The ink wasn’t even dry yet on the just concluded historic, upsized and dramatically oversubscribed bond sales by Saudi Arabia which raised $17.5 billion in three tranches, pricing more cheaply than many investors had expected and virtually on the same as the recent similar bond issue by higher-rated Qatar, and Saudi Arabia was already begun spending the money. Roughly at the same time as the wire transfers were taking place, the Saudis were busy repaying debts to state contractors, after long delays that squeezed company finances and hurt investor sentiment.
As London-based Capital Economics calculated, the total notional amount raised would finance around a third of next year’s state budget deficit and almost all of the kingdom’s current account gap, meaning its foreign exchange reserves were unlikely to fall much further in coming years.
And sure enough, the Kingdom did not waste any time in spending the new money.
According to Bloomberg, among the payments made are those to some major builders as well as companies outside the construction industry, both of which had been in arrears in some cases for months, and which in some prominent occasions such as the Binladin Group, involved the terminations of tens of thousands of workers. Some companies were told 30 to 40 percent of the outstanding dues will be paid before the end of the year, with the remainder to be settled in 2017, two people said.
As we reported at the time, Saudi Arabia had started delaying payments to contractors last year as it scrambled to negotate a budget deficit that has reached about 15% of GDP as a result of the drop in oil prices. The austerity drive caused the non-oil economy to shrink in the last three months of 2015 and the first quarter this year. Today’s issuance of $17.5 billion in dollar bonds is precisely one way the country hopes to shore up its funds.
Finance Minister Ibrahim al-Assaf, speaking in an interview with Saudi-owned network MBC, said payments “have been regularized and will rise in the coming period.” He didn’t give details. According to Bloomberg parts of the interview were leaked on social media. Saudi daily Okaz reported last month that the government had started to pay dues owed to Saudi Binladin Group, the kingdom’s biggest construction company, citing Abdullah Basodan, adviser to company Chairman Bakr bin Mohammed Binladin.
Today’s bond issuance will not be the end of the Kingdom’s attempts to raise cash: the government aims to raise more than $100 billion in non-oil revenue a year by 2020, through measures including value-added taxation. The IMF said on Tuesday the pace of austerity could ease “a little” next year, helping non-oil growth recover to 2.6 percent from 0.3 percent in 2016. The fiscal consolidation, however, “needs to continue over the next five years,” Masood Ahmed, head of the IMF Middle East and Central Asia department, said in an interview in Dubai.
While much of the fund proceeds will be used to make payments in arrears, Saudi Arabia is likely to hold much of the proceeds to stabilize its recently reeling banking sector, and at least defer some concerns about an upcoming devaluation of the Riyal: “This should dampen any lingering concerns that the riyal will be devalued. The government’s debt-to-gross domestic product ratio will rise as a result of the bond sale but, given its low starting point, it is hardly on a worrying path,” Capital Economics said.
Mohieddine Kronfol of Franklin Templeton Investments also agreed that the debut issue would invigorate Saudi financial markets. “Not only could the bond help develop the Kingdom’s debt markets by introducing a more sophisticated type of investor, but there are also positive ripple effects for Gulf Cooperation Council fixed income as well as more global investors to take a closer, and longer-term, look at the region.”
So far the market agrees with the bullish assesment, and as shown in the chart below, Saudi CDS have stopped moving wider in recent months.