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Friday, October 21, 2016

Saudi Arabia plans up to $17.5 billion in first bond issue!

RIYADH: Saudi Arabia plans to raise up to $17.5 billion from its first international bond issue, a source involved in the operation said as analysts expect strong buyer interest. “The terms have been launched, the operation has been launched,” the source said. Saudi has divided the total into three tranches with maturities of five, ten and thirty years, respectively, tailor-made for the American market. However, investor interest in the issue extends well beyond the United States, the source said. The Saudi issue will be bigger than many analysts had expected.

It will be the largest ever from an emerging-market nation, Bloomberg News said, putting overall demand at close to four times the amount on offer.

Saudi Arabia, the world’s largest oil exporter, projected a budget deficit of $87 billion this year after a fall in oil revenues, which still account for most of its income.

To cover the shortfall, Saudi Arabia is re-orienting its economy by imposing unprecedented subsidy cuts and slowing government projects. In September it cut cabinet ministers’ salaries, among other measures.

The kingdom last week began meetings with potential investors ahead of the bond issue.

According to the sources cited by Bloomberg News, the kingdom is pricing the five-year bonds to yield about 140 basis points over US Treasuries.

Christopher Dembik, global head of macroeconomic research at France’s Saxo Bank, said the kingdom’s offer “is going to arouse strong interest on the part of investors”, and could be four or five times oversubscribed.

He said investors are desperately looking for yield, and the Saudi offer “will be certainly slightly above that of its neighbours because of its less favourable sovereign debt rating and a recent global trend towards higher sovereign rates,” he said.

Saudi Arabia has already issued domestic bonds but that has led to a tightening of bank liquidity, according to Patrick Dennis, lead Middle East economist at Oxford Economics in London.

“So that’s the main reason why they’re now borrowing overseas,” he said. Saudi banks’ loan-to-deposit ratio rose for the fifth consecutive month in August, reaching 90.8 per cent, because of faster growth in credit relative to deposits, Riyadh’s Jadwa Investment said in a report this month.

Borrowing abroad also reduces the drain on the kingdom’s foreign reserves, Dennis said.

Official data show those reserves declined to $562 billion in August from $732 billion at the end of 2014.
The reserves remain very large but their rapid drawdown shows a need for diversified funding, Dennis said.

London-based Capital Economics said in a briefing paper that Saudi reserves are now “unlikely to fall much beyond their current level in the coming years” because the bond issue will finance around a third of next year’s budget deficit and almost all of the current account shortfall.

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