Saudi Arabia's crisis matters much more to global investors than the relatively small size of the country's bond market suggests. The kingdom and its Gulf Cooperation Council neighbors have a growing need to ramp up debt sales, so expect them to do all they can to avoid rattling investors.
Saudi's corruption crackdown has pushed spreads on its 10-year bond up by 25 basis points, dragging the rest of the region with it. Spreads on smaller countries such as Oman and Bahrain have widened even more, while even the stronger credits of Abu Dhabi and Kuwait have underperformed U.S. Treasuries.
Raising money in the bond market is a cornerstone of the Saudi government's Vision 2030 plan to cuts its economy dependence on oil. The country first issued dollar bonds in October 2016, and came back to the market for a second slab of bonds in September. It now has $30 billion outstanding in debt, with maturities ranging from four to 30 years.
The outstanding foreign debt of GCC members has jumped to $207 billion from $117 billion over the last two years. It now accounts for an 11 percent share of the $2 trillion aggregate index, up from 8.4 percent at the start of 2016.
That growth has made it impracticable for most funds not to be invested in the region. Many have been racing to ramp up their holdings in the region, propelling sales of new GCC bonds to $100 billion in the last year. The bonds have been a helpful source of index outperformance as credit spreads in western markets have tightened.
Now comes the tricky part. So far, U.S. investors in particular have been content to boost their exposure, encouraged by the widening spreads. But if the crisis deepens, it risks driving buyers away from all Middle Eastern issuers just as they were experiencing a debt renaissance.
Diversifying sources of funding is fundamental to Saudi's budget plans. Investors will be crossing their fingers that logic will prevail and the authorities won't let this spiral out of control. The question is whether they will be able to maintain that grip.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the editor responsible for this story:
Edward Evans at firstname.lastname@example.org