As everyone waits with bated breath for the outcome of the OPEC Algiers agreement to curb output next month, there is now a growing need for a deal to be struck and the cartel’s kingpin Saudi Arabia is not acting two-faced when it presses colleagues for a deal.
Iran and other hard-up economies in the OPEC club may be keener to produce their way out of years of sanctions and constraints, but Saudi has a crisis in debt it now needs to address.
On Tuesday, Saudi Arabia released price guidance for its first international bond issue in a decade.
Riyadh is thought to be targeting a sale between $10bn and $15bn in a five-, 10- and 30-year tranche of debt, making it the largest issue of international debt in the Middle East and a potential rival to Argentina’s record-breaking $16.5bn emerging market bond sale earlier this year. The sale is expected to complete on Wednesday.
As an indicator of where the Arab sovereign stands in credit terms, the shortest maturity is to be offered at 160 basis points over the equivalent 5-year US Treasury note, the 10-year at 185 bps over the 10-year, and the 30-year at 235bps over the T-Bond.
While prices could tighten during the sales process, the 10-year looks set to be priced at around 3.6% – in line with investors’ expectations. SO nothing controversial about the borrower there.
But the last time the biggest economy in the Middle East borrowed was before the financial crisis engulfed the world in 2008.
This time, Saudi Arabia is not borrowing in good times globally. But this time it doesn’t really have a choice.
While many economies borrow when they don’t really need to in order to embed a capital market – witness hitherto low debt or well-managed states like Hong Kong and Singapore, Saudi Arabia is borrowing because the two-year oil price recession has hit its coffers.
Saudi Arabia knows that for such a large oil producer, to simply increase output would only add at the margin to its losses in the global glut of oil that has sent the price of crude as low as $27 a barrel this February.
But the country is now sitting on a record and, by world standards huge, budget deficit of $100bn, as recorded in 2015.
What other nation would hike petrol prices when the world’s fuel prices are in freefall? Saudi. It has already raised domestic petrol prices by up to 40% as part of a raft of measures brought in to address the budget. Subsidies for water, electricity and petrol are expected to be dismantled over the next five years. The kingdom has traditionally kept prices low for residents as a social welfare measure.
What is more, Saudi may be the biggest but it is far from the only Arab state seeking to borrow where oil revenues no longer keep the economy afloat.
In January, neighbours Qatar obtained a $5.5bn loan at 110 bps over Libor, while Oman secured a $1bn loan at 120 bps above that benchmark.
Story by ProactiveInvestors