First Saudi Sovereign Debt Since ’07 Seen This Year as Oil Bites

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Saudi Oil
An oil installation stands in Saudi Arabia's northeastern Gulf port of Jubail. The world’s biggest oil exporter hasn’t issued debt with a maturity of more than 12 months for eight years, choosing instead to run down reserves when necessary to fund expenditure. Photographer: Bilal Qabalan/AFP/Getty Images

Saudi Arabia may issue sovereign debt for the first time since 2007 this year after oil’s decline sent its cash reserves plunging, according to Ashmore Group Plc.

Assets of the biggest Arab economy’s central bank tumbled by 76 billion riyals ($20 billion) in February, the largest monthly drop since at least 2000. The country has a debt-to-GDP ratio of about 2.6 percent, according to International Monetary Fund estimates, among the lowest in the world, and may now take advantage of record low interest rates and ample bank liquidity, said John Sfakianakis, a Riyadh-based director at Ashmore and former chief economic adviser to Saudi’s Ministry of Finance.

“If oil prices remain at $55 to $60 a barrel, I would expect them to issue some debt in the second half,” Sfakianakis said by phone March 31. “They will tap the local debt market through medium-term paper, which would be a balanced fiscal approach, to partly use reserves and partly the debt markets.”

The world’s biggest oil exporter hasn’t issued debt with a maturity of more than 12 months for eight years, choosing instead to run down reserves when necessary to fund expenditure. Saudi Arabia has vowed to maintain spending on its major projects, including railroads, power stations, desalination plants and universities, even after oil prices dropped by half in the past nine months.

‘Draw on Savings’

The kingdom will borrow and rely on its reserves while continuing its spending plans, state-run Saudi Press Agency cited Economy Minister Mohammad Al-Jasser as saying Dec. 25. Money from the hydrocarbons industry contributes about 90 percent of government revenue in the country, according to a Standard & Poor’s report in June.

Brent crude, a benchmark for half of the world’s oil, traded at about $55 a barrel today from $115 a barrel in June.

While there “was a sharp drawdown” of reserves in February, Saudi Arabia still has substantial savings, James Reeve, the London-based deputy chief economist at Samba Financial Group, the kingdom’s third-biggest bank, said by e-mail March 31. “They can continue to draw on savings to finance their position well past 2020 and we don’t think they will issue debt just for the sake of it.”

Foreign assets at the Saudi Arabia Monetary Agency were 2.65 trillion riyals at the end of February, according to data compiled by Bloomberg.

Ample Cash

The kingdom forecast revenue to drop more than 30 percent in 2015 to 715 billion riyals, while expenditure was set at 860 billion riyals, according to a Finance Ministry statement Dec. 25. Spending in 2014 is estimated to have been 1.1 trillion riyals, 29 percent higher than targeted, it said. Economic growth in 2015 will probably slow to 2.5 percent from an estimated 4.6 percent last year, according to the median forecasts of 15 economist estimates compiled by Bloomberg.

Saudi Arabian banks have ample cash to lend, with their combined loans-to-deposit ratio at 86 percent at the end of February, according to data from the central bank. That would mean banks still hold 14 riyals for every 100 riyals of deposits. The loans-to-deposit ratio was 97 percent in the United Arab Emirates, the second-biggest Arab economy.

Lending to the private sector in Saudi Arabia grew 11.6 percent in the 12 months through February and dropped 2 percent to the public sector, central bank data shows.

The government “might issue some debt because the percentage of sovereign debt to GDP is one of the lowest globally,” Mazen Al-Sudairi, the head of sell-side research at Alistithmar Capital, a unit of The Saudi Investment Bank, said by phone from Riyadh on March 31. “If they’re sure interest rates will remain low for a long period they might issue right now.”