RIYADH/ABU DHABI - Saudi Arabia has raised $5.50 billion from the sale of dual-tranche dollar-denominated Islamic bonds, or sukuk, on strong demand, allowing it to substantially tighten the pricing. The five-year Islamic debt was priced at $2.25 billion with spreads set at 65 basis points over U.S. Treasuries, tighter than the 95 bps indicative price guidance released yesterday.

The 10-year portion was priced at $3.25 billion with spreads set at 75 bps, narrowed down from 105 bps, the fixed-income news service IFR said. The proceeds from the debt transaction, which attracted over $17.5 billion in orders, will be utilised for general domestic budgetary purposes.

Saudi Arabia has pushed forward with spending on a massive economic transformation programme known as Vision 2030 that aims to diversify its revenue sources to wean the economy off dependence on hydrocarbon income. It has regularly tapped debt markets to plug a growing budget deficit and is projected to post a fiscal deficit of around $27 billion this year.

"Although they had more than covered the budgeted deficit, mainly with local issuance, the actual deficit will be quite a bit higher, given weaker-than-anticipated oil prices and (so far at least) higher spending than budgeted, hence more issuance will be needed than in the borrowing plan," said Justin Alexander, director at Khalij Economics and Gulf analyst at GlobalSource Partners.

Citi, HSBC, JPMorgan and Standard Chartered are the global coordinators and bookrunners for the debt sale, with ICBC and Mizuho banks acting as active joint lead managers, IFR reported.

Saudi Arabia's public debt stood at 1.38 trillion riyals ($368 billion) at the end of the second quarter, the finance ministry said in July.

($1 = 3.7519 riyals)

(Additional reporting by Mohammad Edrees and Ateeq Ur Shariff in Bengaluru; Writing by Rachna Uppal; Editing by Tom Hogue, Andrew Heavens, William Maclean, Kevin Liffey and Saad Sayeed)