How economists reacted to Saudi $17.5 billion bond debut

Thursday 20 October 2016

JEDDAH: The dollar revenues that the Saudi Arabia’s international bond sale brings will help finance the Kingdom’s current account shortfall, according to analysts.

The Kingdom launched the sale of $17.5 billion of debt on Wednesday, in what would be the largest emerging-market bond issue.

“The first international bond sale was very well received and the pricing was cheap,” James Reeve, London-based deputy chief economist and assistant general manager of Samba Financial Group, told Arab News.

“The Saudi issue has a rarity/diversification value for portfolio managers. It is also a member of the G20,” he pointed out.

Other analysts suggested that the large order book suggests there is demand for the deal far beyond the traditional emerging-market investor universe.

John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh, commented: “Saudi Arabia’s bond program has been a tremendous success and have overwhelmed even the most conservative observers.” He added: “Saudi Arabia is serious on reforms and has embarked on a program of change. The bond program is a true representation of the monumental changes the country is undertaking.”

Fiscal consolidation

Sfakianakis said: “Saudi Arabia has gone full-blast on all engines and it is not reaping the benefits what is going to be one of many successes. The authorities have taken advantage of the window before the (US) elections and a possible rate increase. Print a lot now and then we see what happens. Alternative sources of revenues will be secured and over time there will be spread tightness that will help many Saudi corporates.” Steffen Dyck, VP-senior credit officer at Moody’s and lead analyst for Saudi Arabia, said: “The international bond issuance will help diversify the Kingdom’s funding base. International debt issuance will reduce pressure on foreign exchange reserves.” Dyck added: “Reduced reliance on domestic debt issuance and drawdown of government deposits in the domestic banking system to fund fiscal deficits will lift some pressure on domestic liquidity. While government debt levels will rise in line with persistent fiscal deficits, they will remain manageable in our baseline scenario.” In a related development, Fitch Ratings stated Wednesday that banks in Saudi Arabia and Qatar are better placed than GCC peers to cope with an eventual deterioration in asset quality brought about by a prolonged period of weak oil prices.

The Fitch statement added: “Our base case is that GDP will continue to grow in 2017 and 2018 across all GCC countries and we forecast a gradual rise in oil prices to $55 a barrel by 2018. Nevertheless, we examined the impact of lower for longer oil prices on asset quality across the region and concluded that loss-absorption capacity in the Saudi banking sector ranks highest among GCC countries and that both Saudi Arabia and Qatar would continue to offer the soundest lending opportunities under that scenario, suggesting impaired loan ratios should increase more slowly in these countries than their peers.” Breathing space

Commenting on the bond sale, Mushtak Parker, an independent London-based economist and financial writer with a special interest in Saudi Arabia, told Arab News: “I believe that an active international debt program may give that vital breathing space and extra fiscal consolidation that will be needed to effect the Kingdom’s structural reforms.” Parker added: The proceeds from the issuance will be used to fund government development programs. But I hope the government will also use some of the funds to pay Saudi companies who have experienced delays in payment of almost 18 months. This has had a knock-on effect on the private sector and of course their employees including expats especially in sectors heavily dependent on government contracts such as contracting and construction.” Parker said: “To meet large financing needs over the coming years, Saudi Arabia has multiple financing options. It can draw down the large stock of government deposits held at the central bank, sell other financial assets, or borrow domestically or abroad.” He said: “The IMF’s latest report on Saudi Arabia published this month stressed that lower oil prices and fiscal consolidation are resulting in slower economic growth. Non-oil growth has already weakened over the past year, and is likely to slow further in 2016, while employment of Saudi nationals in the private sector has come to a halt.

In 2016, Parker said that the impact on growth in expected to be much larger as it includes the lagged impact from consolidation in 2015 along with the consolidation expected in 2016. This weakening economy provides the backdrop against which the structural reforms would need to be implemented, he said.

“As the fund suggested, going forward, an acceleration of ongoing structural reforms is critical to spur stronger productivity growth and private investment to offset slower public investment,” Parker said.

He added: “Structural reforms have been ongoing in Saudi Arabia, but will need to deepen. Vision 2030 and the National Transformation Program have outlined reforms and policies that could help expand the size of the private sector and more broadly diversify and transform the economy.” Parker said: “In terms of the sequencing of these reform measures, it is important that a focus is put on those that can have a relatively quick positive impact on growth. Poor sequencing and implementation will not only weaken the effectiveness of the reforms, but will also increase the risks that they are reversed at a later date. These are indeed challenging but interesting times for the Kingdom.”