Saudi Arabia is one of the largest oil producing regions in the world, accounting for 16% of the world’s proven petroleum reserves. As of 2015, crude accounted for roughly 80% of government revenues, 45% of GDP, and 90% of earnings from exports. Though crude oil has recently managed to briefly climb back above $50.00 per barrel, it is significantly less expensive than in prior years after the slump sent prices as low as $26.05 a barrel earlier in the year. As a result, the deficit laden kingdom of Saudi Arabia has been shopping for banks as it contemplates a long-anticipated debut on international capital markets.
Next week, talks with banks will heat up as they make final pitches to sell a possible $15.00 billion issue of dollar-denominated debt later this year. Investors are expected to show strong demand for these bonds, a signal that the market is comfortable with their ability to pay them back, showing strong faith in the oil market.
Saudi Economy Slides
The oil dependent kingdom has seen some tough times as crude futures remain near $50.00 and below. As a result, the nation’s sovereign bond rating was cut by all three rating agencies earlier in the year. In order to finance the budget deficit low oil has created, the Saudi Finance Minister has overseen local debt issuances and sold off $133.00 billion worth of foreign reserves. Last month, the country took out its first loan in 15 years, a $10.00 billion borrow that will only cover part of the estimated $100.00 billion budget deficit projected for 2016.
Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman announced a plan to make the country’s economy less reliant on oil by 2030. However, until that plan comes to fruition, Saudi Arabia will be issuing its first government bonds to the capital markets in order to facilitate a balanced budget.
Bankers familiar the plans said that Saudi Arabia’s ministry of finance will be hosting a “beauty parade” of lenders on June 6-7 to hear proposals on how to organize the cash-poor government’s first dollar-denominated bond. The same banks involved in the kingdom’s $10.00 billion April loan are expected to take part. These name brands include the Bank of Tokyo-Mitsubishi, HSBC, and JPMorgan Chase. Additional banks that are likely to have a seat at the table include BNP Paribas, Citigroup, Deutsche Bank, Goldman Sachs, and Morgan Stanley.
Oxford Economics calculates that as an oil producer with a credit rating of AA- and equivalent, Saudi Arabia should expect to pay about 150 basis points above 10-year US Treasury yields to borrow from capital markets. That means Saudi Arabia could borrow around 3.8%-4.0% if Treasuries remain unchanged, which is more expensive than bond issues from Qatar and Abu Dhabi placed earlier in the year. “Investors are already engaged,” said a trader at one of the banks linked to the country’s debt sale. “This bond sale has been long rumoured[sic] and Saudi Arabia has one of the world’s lowest debt-to-GDP ratios so there is already strong interest.”
Middle East Desperate for Cash
Saudi Arabia is not the only oil producing country that has issued debt to balance their budget during these trying times for crude prices. The Middle East has account for $30.00 billion in debt issuance to-date in 2016. The six-nation Gulf Cooperation Council raised a combined $12.50 billion in May alone from capital markets, the largest monthly sum on record. Last week Qatar, which owns one of the world’s largest gas reserves, sold $9.00 billion worth of bonds in 5, 10, and 30 year tranches, marking the biggest ever bond issue from the Middle East. Saudi Arabia’s proposed bond offering would make the regions government debt issuance dwarf previous years only halfway through the calendar year.