Photographer: Waseem Obaidi/Bloomberg

Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides

  • Kingdom's credit-default swaps climb to the highest since 2009
  • Brent crude retreats below $35 a barrel to a 2004-low

Investors wanting to take out insurance on Saudi Arabia’s debt have to pay as much as they would for Portugal, a nation still saddled with a junk credit-rating five years after an international bailout.

The cost of insuring the kingdom’s debt more than doubled in the past 12 months to a 190 basis points, or $190,000 annually to insure $10 million of the country’s debt for five years, as of 4:14 p.m. in Riyadh, the highest since April 2009, according to CMA prices compiled by Bloomberg. That’s almost identical to contracts linked to debt from Portugal, whose rating is seven levels below Saudi Arabia’s Aa3 investment grade at Moody’s Investors Service.

Saudi Arabia’s credit risk is rising as oil prices sink.
Saudi Arabia’s credit risk is rising as oil prices sink.

Saudi Arabia’s finances are under pressure as it fights a war in Yemen at a time when crude prices are languishing at the lowest level in almost 12 years. The country, which counts on energy exports for 70 percent of government revenue, sold domestic bonds for the first time since 2007 last year to help fund a budget deficit that may have been the widest since 1991. Net foreign assets dropped for 10 straight months through November, the longest streak since at least 2006, to $627 billion.

“They have huge reserves and extremely low debt, but the question is, how long are oil prices going to stay at this level?” said Anthony Simond, an investment manager who helps oversee about $10 billion of emerging-market debt at London-based Aberdeen Asset Management.

Brent crude, a pricing benchmark for more than half the world’s oil, sank below $35 a barrel last week. It advanced 0.8 percent to $31.82 a barrel today, rebounding from the lowest level in almost 12 years.

The Saudi government, which doesn’t have any outstanding international bonds, said it will choose from options including selling local and international debt and drawing from its reserves to finance an expected 2016 budget deficit of 326 billion riyals ($87 billion).

Proxy Debt

The bonds of state-controlled Saudi Electricity Co., used as a proxy for the government in the absence of any international sovereign debt, have tumbled as oil has retreated. The yield on the company’s $1.5 billion securities due April 2024 has surged 49 basis points since the start of the year to a record 4.6 percent on Monday. The extra yield investors demand to buy the debt instead of U.S. Treasuries of similar maturity rose to an all-time high.

Yield spread between Saudi Electricity’s bonds and U.S. Treasuries widened to a record.
Yield spread between Saudi Electricity’s bonds and U.S. Treasuries widened to a record.

“Rising spreads may have an impact on whether or not they come to the market,” Simond said.

Saudi Arabia last month announced spending and subsidy cuts, reflecting scaled-back revenue expectations. The nation’s budget envisions cutting expenditure to 840 billion riyals ($224 billion) this year after it reached 975 billion riyals in 2015, 13 percent above target. The kingdom has assets that it hasn’t utilized yet, and non-oil revenue may reach $100 billion over the next five years, Deputy Crown Prince Mohammad bin Salman said in an interview with The Economist last week.

Traders are insuring more Saudi debt than ever, with outstanding contracts covering an unprecedented $636 million as of Jan. 1, according to Depository Trust & Clearing Corp. data. While that’s less than half the bonds insured from the United Arab Emirates, it’s a leap for a nation whose debt-to-gross domestic product rose to almost 7 percent last year from less than 2 percent in 2014, according to the International Monetary Fund.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. They’re used to hedge against losses or speculate on creditworthiness.

More Risks

With the kingdom’s finances strained and tension escalating between mainly-Sunni Saudi Arabia and Shiite-dominated Iran, Barclays Plc sees five-year default swaps rising a further 50 to 100 basis points, according to an e-mailed report on Wednesday. Protesters in the country’s eastern region, home to the majority of both its Shiite minority and its oil, clashed with police following the government’s execution of a prominent shiite cleric this month.

Rising Saudi credit-default swaps reflect "investors’ fears of more Sunni-Shiite tensions in Eastern Province and intensification of fighting in Yemen in the coming months," said Sergey Dergachev, a senior money manager who helps oversee about $13 billion at Union Investment Privatfonds GmbH in Frankfurt. "Assuming low oil prices as they are now, there is a substantial chance that Saudi Arabia will issue its first dollar-denominated bonds. Current levels of let’s say 4-percent for a 10-year bond are attractive, for both issuer and investors."

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