Saudi Arabia, the largest oil producer in OPEC, is experiencing significant challenges with balancing the budget because of the fall in oil prices, from the sale of which the Treasury of the Kingdom receives 73% of revenues. In these conditions, Riyadh, before their financing costs by borrowing and limited use of accumulated financial reserves, not only went to the sharp reduction in public spending, but also prepared for the first time in history to borrow on the international debt market.
International banks have already joined the struggle for the right to become the underwriters of the deal, writes The Financial Times (FT). At its end it may be a new benchmark in the debt market of the Middle East, experts say.
Last year the authorities of the Kingdom for the first time since 2007, released in rials denominated bonds on the domestic market, local banks have purchased bonds for a total amount of 15 billion riyals ($4 billion). The borrowing cost is cheap, but to expand the pool of lenders the government also plans to place dollar-denominated bonds. At the first stage the country may issue dollar-denominated bonds by $5 billion, the FT said analysts at two unnamed banks.
They do not exclude that the issue will be divided into several tranches, the first of which is unlikely to be a long-term paper. Although this amount will not be able to significantly help Riyadh with reducing the budget deficit, the authorities is beneficial to start with a small release because investors are noticeably concerned about the ability of the Kingdom to service its debt obligations. According to an unnamed European banker, Saudi bonds will be placed with the award in 200 b.p. to the yield of U.S. Treasury bonds with the same maturity; this means that the profitability of Saudi bonds will amount to 3.34%. Estimated Saudi officials, the budget deficit of the Kingdom, which by the end of 2014 amounted to 44 billion riyals ($11.7 billion), or 1.6% of the GDP to reach 50% of GDP by 2020.
According to credit analysts, the size of the host first in the history of international bonds of Saudi Arabia will depend on three factors — oil prices, market volatility, and financial reserves of the Kingdom. The latter steadily decreased since February of last year, when their level was $737 billion, and by the end of the year amounted to $640 billion, the Volume of fedreserve continues to fall amid low oil prices and Saudis spending on military operations in Yemen and Syria. This increases the risk that Riyadh will untie Riyal from the US dollar, say observers. Previously this decision was made by another Petro-intensive economy, unable to withstand falling oil prices: December 21, 2015 its currency to float freely sent Azerbaijan.
If market conditions improve, the debut placement of the Kingdom may be one of the most successful in the bond market. If oil prices continue to fall, and the Saudi reserves are declining, production will be limited to several billion dollars, which the country will take at inflated rates.
The authorities are also considering the privatization of the largest oil production company in the world Saudi Aramco. In the IPO, the Corporation may be valued at $2-3 trillion, says BNP Paribas analyst Andrew Macfarlan. Thus, revenue from the sale of 5% stake in the company enough to cover the annual deficit of the country. However, the IPO has not been announced and a clear plan IPO yet. Borrowing on external debt markets is considered a matter of closer prospects.