Saudi Trade-Hub Goal Spurs Bond Issues: Freight ColumnGlen Carey
Saudi Arabia increased spending on transportation to a record this year as the Arab world’s biggest economy seeks to catch up with the United Arab Emirates and Qatar in the race for pre-eminence as a trading center.
That expansion is deepening the bond market as Saudi Arabia expands port capacity to handle more than 5 million 20-foot equivalent units a year. The kingdom is also installing 2,400 miles (3,860 kilometers) of rail lines and has opened the Saudi aviation market to carriers Gulf Air and Qatar Airways.
Saudi Finance Minister Ibrahim Al-Assaf said on Dec. 30 that he expected more sukuk, or Islamic debt, for the planned expansion of Riyadh and Jeddah airports. Government agencies with “the ability to generate income and operate commercially” are well-placed to issue bonds, al-Assaf said in May.
State-owned entities “are planning to issue long-term government-backed bonds to finance major projects, including a railway,” Mohammed Al-Omran, a financial analyst and president of the Gulf Center for Financial Consultancy in Riyadh, said in a phone interview. “It is very attractive for investors to take exposure to such sukuk because of the excellent return and modest risk.”
The kingdom’s General Authority of Civil Aviation, or GACA, sold 15 billion riyals ($4 billion) of Islamic bonds in January last year. Saudi Arabia issued the most bonds last year in the Middle East at $6.3 billion, followed by Qatar at $4 billion, according to data compiled by Bloomberg.
Under King Abdullah, the Saudi government has announced investment plans of more than $500 billion as the monarch tries to diversify the economy from oil, which accounts for 90 percent of government revenue. Abdullah raised overall government spending by almost a fifth this year to $219 billion.
Saudi Arabia’s neighbors have moved faster on transportation infrastructure. Dubai has gotten ahead of the game with the largest airline in the Middle East and with Jebel Ali, the biggest port between Rotterdam and Singapore, said Asim Bukhtiar, senior analyst at Riyad Capital, in a phone interview.
“They invested in infrastructure and moved toward opening up the economy faster than Saudi Arabia,” he said. “Saudi Arabia will probably move in that direction by opening up to foreign investments.”
The budget allocation for transportation and telecoms expanded 84 percent this year to $17.3 billion, the fastest pace since at least 2004, according to data on the Finance Ministry website. New projects, worth $8 billion, include 3,700 kilometers of roads and additional berths at expanded ports.
The kingdom has 206 mechanized and organized berths and 11,000 ships dock a year in ports on the Red Sea and the Persian Gulf, according to data on the website of the Saudi Ports Authority.
In April, Red Sea Gateway Terminal Co., a unit of Saudi Industrial Services Co., opened a $540 million container terminal at the port in Jeddah. That added 1.8 million 20-foot equivalent units of capacity. Jeddah Islamic Port handled 4.74 million 20-foot equivalent units last year, compared with 4 million 20-foot equivalent units in December 2011.
“Saudi Arabia still has some way to go in repairing the reputation it developed by 2003” of an underdeveloped infrastructure, said Crispin Hawes, an analyst at the New York-based Eurasia Group, which monitors political risk. “It is still running to catch up where it should have been with its neighbors. There are important bottlenecks in transport and freight infrastructure, including roads and ports.”
The 950-kilometer Land Bridge Project, covering a distance equivalent to that between Los Angeles and Oklahoma City, will link the Red Sea with a dry port in Riyadh and continue onto Jubail on the Persian Gulf coast. The $7 billion cross-country rail link will enable companies to carry freight from coast to coast in about 18 hours, compared with the five to seven days it can take to ship goods across the Arabian Peninsula.
The transportation expansion is also spurring record lending as companies seek capital to finance projects. Bank financing to the private sector rose at the fast pace in almost four years to 951 billion riyals in December, according to data from the central bank.
Closely held contractors such as Saudi Oger and the Saudi BinLaden Group are benefiting from the government’s investment program, Al-Omran said, adding to pressure on them for a public listing.
“Public opinion here is pushing the Saudi government to enforce large contractors to go public by listing their shares on the stock exchange due to the large size of projects granted to them,” he said. “This is a critical test for the government in its economic reform mandate.”
The Saudi economy expanded at 6.8 percent last year. That beat the forecast of 5.6 percent by 16 analysts polled by Bloomberg News. Growth is expected to slow to 3.9 percent this year as oil production declines.
“Although the private sector has grown significantly in recent years, the main driver of growth remains government spending,” Eurasia’s Hawes said. “Spending on transportation infrastructure is about driving growth as much as it is about the infrastructure itself.”
A year before Abdullah, who turns 90 next year, became king, the government’s infrastructure spending was only $1.95 billion in 2004 and $2.4 billion a year later, one-sixth of the present level. From 2006 onwards, infrastructure and telecom budgets under Abdullah have increased on average of 30 percent.
Abdullah is the sixth king to rule the country since it was formed in 1932 by his father Abdulaziz Al-Saud. He conquered the country through a series of military campaigns from near Riyadh.
“It is significant for Abdullah to leave his legacy,” said Theodore Karasik, director of research at the Institute for Near East and Gulf Military analysis in Dubai. “The infrastructure network is just one of many feats that helps to strengthen and solidify the Saudi state.”