Saudis Favor Local Sales as They Plan to Deepen Debt Markets

  • Target is to keep ratio of about 65 percent local debt
  • Debt management office studying potential first-quarter sale

Saudi authorities plan to keep selling local bonds every month as they seek to finance the budget deficit and deepen a nascent debt market, according to the official overseeing the kingdom’s borrowing strategy.

Fahad Al-Saif, head of the debt management office at the Ministry of Finance, said local issuance makes up about 65 percent of the kingdom’s sales and the government wants to maintain this ratio “plus or minus 10 percent for the foreseeable future.”

The world’s biggest oil exporter turned to the bond market after the slump in crude prices battered its public finances, causing the budget deficit to surge to 15 percent of economic output. Over the past year, the kingdom has sold $9 billion in international Shariah-compliant debt and $30 billion in conventional bonds. It has also raised billions of riyals in local sukuk, something Al-Saif said is helping develop a yield curve -- a benchmark that could encourage Saudi companies to become regular issuers as well.

The government has sold a total of 38 billion riyals ($10.1 billion) of local debt over the past four months, he said in an interview in Riyadh. “We want to continue to issue locally every month, again subject to market conditions, investor appetite and also Ministry of Finance requirements.”

The government is also studying when to return to international markets next year, with a sale in the first quarter possible, Al-Saif said. Those discussions are still internal and the government is not talking to advisers yet, he said.

Other key points from the interview include:

  • The government is keen to establish a secondary market for local sukuk and is in talks with “a couple of financial institutions” on how to best achieve this
  • Some investors want to have a “a constant dividend-yielding type of instrument,” which could help in creating a secondary bond market
  • The government is also studying accommodating regional participation in local sukuk sales and has sought feedback from advisers: “One day we want to become the regional issuer and we wanted to make sure that the sukuk program could accommodate that”
  • The kingdom’s debt service to revenue ratio is 1 percent, and debt service to economic output ratio is 0.2 percent, Al-Saif said: “This is absolutely incomparable, absolutely lowest in the world”
  • For now, Saudi Arabia is not seriously considering sales in currencies other than the dollar and the Saudi riyal.
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