Saudi Arabia Seen Undeterred by Potential Fed Hike to Sell Bond

  • Kingdom said to plan sale of $10 billion of bonds in October
  • ‘Most awaited’ issuance in 2016 seen leaving room for more

Saudi Seen Unconcerned by Fed Plan

Saudi Arabia will probably push ahead with the sale of at least $10 billion of bonds even if the U.S. raises interest rates next month, spurred on by demand for emerging-market assets that may leave enough room for other Gulf states to follow.

The kingdom is planning to sell its first international debt securities in early October as the country seeks to plug a budget deficit estimated at about $80 billion this year, people with knowledge of the matter said. The government may market the securities to potential investors in the last week of September and issue the debt early the following month, the people said, asking not to be identified as the information is private.

“Saudi Arabia’s mega-bond deal is the most awaited emerging-market bond sale this year,” said Trieu Pham, a strategist at Mitsubishi UFG Financials Group Inc. in London. “The Federal Open Market Committee’s meeting in September therefore won’t pose a serious hurdle.”

While the timing and size of the deal may change depending on market conditions, the kingdom wouldn’t be concerned by a potential U.S. interest rate increase next month, one of the people said. Traders see one-in-three odds of higher U.S. interest rates after the Sept. 20-21 meeting, increasing bets from zero two weeks ago, as some policymakers predict growth picking up.

Record Inflows

The possible sale comes as Kuwait plans to issue as much as $9.9 billion of bonds, with Bahrain and Kuwait also considering deals after Qatar raised a record $9 billion in May and Abu Dhabi $5 billion in April.

“Having seen record emerging-market inflows in recent weeks despite a lack of issuance, there will also be room for other Gulf issuers, even if Saudi Arabia issues above $10 billion,” Pham said.

Gulf bond sales are surging as governments seek to plug budget gaps after oil’s slump.


Not everyone is convinced that Saudi Arabia’s issuance will succeed if it’s done after the Fed meeting, which could cause demand for riskier emerging-market assets to wane.

“I would have thought they would do it a little bit earlier,” Sergey Dergachev, a senior money manager at Union Investment Privatfonds GmbH in Frankfurt, which oversees about $13 billion, said in e-mailed comments. “Timing is very crucial for success of the issue. My fear is that by the end of September, or early October, most issuers will issue. Placing $10 billion is a huge amount, and it needs some time to get absorbed by market participants.”

Less Competition

It would be better to get the sale done by early September, when there is less competition from other issuers in the Gulf, and still comparatively low borrowing costs, he said.

Citigroup Inc., HSBC Holdings Plc, and JPMorgan Chase & Co. were hired as global coordinators for the Saudi Arabia deal, people familiar with the situation told Bloomberg in June. Proceeds would be used to help fund an economic transformation plan and plug a budget shortfall caused by the slump in oil prices, they said. The gap is estimated at 13 percent of economic output this year, according to the International Monetary Fund. 

The kingdom earlier this year hired HSBC banker Fahad Al Saif to start a debt management office responsible for the bond sale. The office is still working on hiring personnel and implementing policies, which could affect the timing, one of the people said. Saudi Arabia also celebrates a week-long religious holiday in September.

Debt Downgraded

Moody’s Investors Service downgraded the kingdom’s debt to A1 in May, the fifth-highest investment grade and two levels below that of both Abu Dhabi and Qatar, saying the slump in oil prices may lead to a “material deterioration” in the nation’s credit profile.

Government debt levels will increase to 30 percent of economic output by 2020 from 7.7 percent, according to targets set out in the transformation plan released in June. The plunge in crude is driving bond sales across the six-nation Gulf Cooperation Council as governments seek to fill fiscal gaps the IMF said could reach $900 billion by 2021.

“This diversifies their sources of revenue and funding, so I think it’s very clever,” said Bob Michele, chief investment officer and head of global fixed income at JPMorgan Chase & Co., in an interview on Bloomberg TV on Thursday. “Oil is in a sweet spot now at $40-50 a barrel, it’s not down at $30 a barrel where it was a couple of quarters ago, so it’s good timing for them.”

Investors are buying the most amount of protection against a Saudi Arabian debt default in at least five years, according to data compiled by Bloomberg. The net amount of outstanding credit-default swap contracts has climbed to $1.1 billion, according to data from the Depository Trust & Clearing Corp. CDS for the kingdom have quadrupled over the last two years from about 40 basis points to about 160 basis points.

Saudi Arabia’s Ministry of Finance declined to comment.