Saudi Arabia in a strong position to tap debt market

Saudi Arabia is in a good position to approach the international debt market next year thanks to the expected issue’s scarcity value, the country’s low debt-to-GDP and reforms in the 2016 budget, analysts said.

"New issuance in the international market is likely to be fairly well received, of course the pricing will be an important factor," said Steven Hess, an analyst at the credit rating agency Moody's. "Global markets recognise that, despite low oil prices now, Saudi Arabia is still sitting on very large oil reserves and has those resources and therefore is creditworthy still."

While Moody’s and Fitch have maintained their AA ratings on the kingdom, Standard & Poor’s in October cut its rating one notch to A+ due to the declining oil prices and the fiscal deficit.

Next year’s fiscal deficit is expected to narrow to 326 billion riyals (Dh319.2bn) from 367bn riyals this year, the Saudi finance ministry said on Monday.

The ratio of debt to GDP, which reached 2 per cent at the end of last year, is forecast to have reached 5.8 per cent of GDP at the end of this year.

“It is certainly possible that if they don’t implement the measures they have announced or oil prices fall much further or they continue to run large budget deficits, one could see downwards pressure on the rating,” said Mr Hess.

The kingdom financed its fiscal deficit last year by tapping the domestic bond market for the first time since 2007 with sovereign issues. It also tapped its foreign currency reserves, which fell by 14 per cent to 2.38 trillion riyals last month compared with November last year.

“Following the announcement of a credible budget with significant and encouraging fiscal consolidation initiatives, appetite should be strong in the region but remain uncertain outside the region,” said Mohieddine Kronfol, the chief investment officer Global Sukuk & MENA Fixed Income, at Franklin Templeton Investments.

However, banks in the region are suffering from a liquidity crunch, which may deter them from fulfilling their traditional role as the big buyers of Arabian Gulf sovereign debt.

With security and military spending being the single biggest item in the 2016 budget, the conflict in Yemen and weak oil prices will also weigh on any international bond issuance.

“There are a fair amount of uncertainties that revolve around the Saudi economy — energy prices and the war in Yemen, one of the revenue side and one on the expense side, which will determine the future credit quality,” said Abdul Kadir Hussain, the chief executive at Dubai’s investment banking and asset management company Mashreq Capital.

The biggest question mark remains the yield that Saudi Arabia would have to pay, which would depend on the size of the issue and its maturity, among other factors.

“The scale of subsidy removal and the public reaction, and the degree of fiscal control and the war in Yemen will also influence the investor confidence and, in return, the yield,” said Alp Eke, the chief economist at the National Bank of Abu Dhabi.

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