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Saudi Arabia borrows $4bn as oil price reality hits home
©Reuters
Saudi Arabia has borrowed $4bn from local markets in the past year, selling its first bonds for eight years as part of efforts to sustain high levels of public spending as oil prices slump.
Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency, said the government would use a combination of bonds and reserves to maintain spending and cover a deficit that would be larger than expected.
“We expect to see an increase in borrowing,” he said, according to a report in the economic daily Al-Eqtisadiah newspaper over the weekend. Analysts have estimated a deficit of about $130bn this year. The government, which had not tapped bond markets since 2007, has been dipping into its large foreign reserves, which peaked at $737bn last August, to sustain spending on wages, special projects and the Saudi-led air war on Yemen. It has drawn down $65bn since oil prices fell.
Bonus payouts for state employees and the military made by the new king, Salman bin Abdulaziz Al Saud, have placed further pressure on state coffers. “Reality is hitting home, and necessity is also hitting home,” said John Sfakianakis, director for the Gulf region at Ashmore, a fund manager.
Saudi Arabia needs an oil price of $105 a barrel to meet planned spending requirements, but the average price for the year is estimated at $58 a barrel, he said. “If the government continues business as usual and draws down like this it will deplete reserves faster than expected, by the end of 2018 or early 2019,” added Mr Sfakianakis.
The issuance of domestic bonds should ease the rate of drawdown on Sama’s overseas assets, which declined to $672bn in May. The domestic bond programme marks a shift in strategy as the sustained slump in oil prices takes its toll on Saudi finances.
Analysts initially doubted that the government would respond to the fiscal challenge by borrowing, seeking to avoid the parlous state of the state coffers in the late 1990s when domestic debt had risen to about 100 per cent of gross domestic product. Saudi domestic debt had fallen to 1.6 per cent of GDP at the end of 2014.
But analysts say the oil-price decline could be more profound than initially thought. Sama forecasts GDP growth to decline from 3.5 per cent in 2014 to 2.8 per cent this year. Non-oil sector GDP growth, which is vital for creating jobs for the growing legion of unemployed youths, is expected to decline from 5 per cent to 4.7 per cent over the same timeframe.
The government’s sovereign issuance will provide a benchmark for other private sector and state-related entities looking to borrow from capital markets, diversifying sources of funding away from a banking system that could see liquidity fall on lower oil prices.
The regulator has made reforms in debt capital markets a priority this year after opening up its large domestic market to foreign asset managers last month. The IMF is urging the government to trim spending on public sector salaries and subsidies to improve the fiscal balance, but reforming payouts to a population used to state largesse could trigger a potentially negative political impact. Given the size of the deficit, Riyadh may choose to extend its sovereign bond programme to international markets to allow local institutions to continue to fund the domestic private sector. “They will have to turn to overseas markets eventually,” said one Riyadh-based executive with a foreign lender.
http://www.ft.com/intl/cms/s/0/2fd630a8-2899-11e5-8db8-c033edba8a6e.html#axzz3fiQBUXbo
@Arabian Legend @al-Hasani @user1 @Hakan @Frogman @JUBA @Slav Defence @faisal6309 @Counter-Errorist @khanboy007 @AUz @ranjeet @yesboss @Avik274 @Al Bhatti @Saif al-Arab @Metanoia @Pakistani Exile
©Reuters
Saudi Arabia has borrowed $4bn from local markets in the past year, selling its first bonds for eight years as part of efforts to sustain high levels of public spending as oil prices slump.
Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency, said the government would use a combination of bonds and reserves to maintain spending and cover a deficit that would be larger than expected.
“We expect to see an increase in borrowing,” he said, according to a report in the economic daily Al-Eqtisadiah newspaper over the weekend. Analysts have estimated a deficit of about $130bn this year. The government, which had not tapped bond markets since 2007, has been dipping into its large foreign reserves, which peaked at $737bn last August, to sustain spending on wages, special projects and the Saudi-led air war on Yemen. It has drawn down $65bn since oil prices fell.
Bonus payouts for state employees and the military made by the new king, Salman bin Abdulaziz Al Saud, have placed further pressure on state coffers. “Reality is hitting home, and necessity is also hitting home,” said John Sfakianakis, director for the Gulf region at Ashmore, a fund manager.
Saudi Arabia needs an oil price of $105 a barrel to meet planned spending requirements, but the average price for the year is estimated at $58 a barrel, he said. “If the government continues business as usual and draws down like this it will deplete reserves faster than expected, by the end of 2018 or early 2019,” added Mr Sfakianakis.
The issuance of domestic bonds should ease the rate of drawdown on Sama’s overseas assets, which declined to $672bn in May. The domestic bond programme marks a shift in strategy as the sustained slump in oil prices takes its toll on Saudi finances.
Analysts initially doubted that the government would respond to the fiscal challenge by borrowing, seeking to avoid the parlous state of the state coffers in the late 1990s when domestic debt had risen to about 100 per cent of gross domestic product. Saudi domestic debt had fallen to 1.6 per cent of GDP at the end of 2014.
But analysts say the oil-price decline could be more profound than initially thought. Sama forecasts GDP growth to decline from 3.5 per cent in 2014 to 2.8 per cent this year. Non-oil sector GDP growth, which is vital for creating jobs for the growing legion of unemployed youths, is expected to decline from 5 per cent to 4.7 per cent over the same timeframe.
The government’s sovereign issuance will provide a benchmark for other private sector and state-related entities looking to borrow from capital markets, diversifying sources of funding away from a banking system that could see liquidity fall on lower oil prices.
The regulator has made reforms in debt capital markets a priority this year after opening up its large domestic market to foreign asset managers last month. The IMF is urging the government to trim spending on public sector salaries and subsidies to improve the fiscal balance, but reforming payouts to a population used to state largesse could trigger a potentially negative political impact. Given the size of the deficit, Riyadh may choose to extend its sovereign bond programme to international markets to allow local institutions to continue to fund the domestic private sector. “They will have to turn to overseas markets eventually,” said one Riyadh-based executive with a foreign lender.
http://www.ft.com/intl/cms/s/0/2fd630a8-2899-11e5-8db8-c033edba8a6e.html#axzz3fiQBUXbo
@Arabian Legend @al-Hasani @user1 @Hakan @Frogman @JUBA @Slav Defence @faisal6309 @Counter-Errorist @khanboy007 @AUz @ranjeet @yesboss @Avik274 @Al Bhatti @Saif al-Arab @Metanoia @Pakistani Exile
