Until recently, the Kingdom did not face significant funding gaps as it dipped into its accumulated reserves in times of need, such as in 2014-2015.
Nor did the country need to develop any expertise in public debt management until the steep fall in oil prices from 2015, causing fiscal deficits as the government had to borrow more than its oil revenues. That has now dramatically changed.
The government as well as state-owned enterprises have developed extensive capabilities in recent years.
The speed, scope and diversity of the Saudi debt management program did not materialize out of a vacuum, but has been led by a cadre of professionals in the finance and international investment fields, bringing a rich cross-fertilization of expertise and talent from the banking sector to government bodies and vice versa.
The July appointment of Hani Al-Medaini, a former senior bank executive with both SAMBA and Saudi British Bank, to head the Ministry of Finance’s Debt Management Office (DMO) is an example, as well as the appointment of the DMO’s former CEO Fahad Al-Saif, who joined the Public Investment Fund (PIF) to become the chief of corporate finance and a member of its management committee, underscoring the cross-fertilization of expertise and skills transfer in finance and debt management, which is one of the hallmarks of the Saudi financial sector today.
The whole story of the Saudi public debt drive started in 2016, when the Kingdom established a DMO in the ministry to develop a comprehensive public debt management framework.
According to the ministry, by H1 2020 the total outstanding debt was around SR820 billion ($218.66 billion), comprising SR470 billion domestic and SR350 billion in external debt, with a perceptible shift in debt strategy toward external debt.
By comparison, as of December 2015, the government’s total outstanding debt amounted to SR142 billion, consisting entirely of domestic indebtedness. The reasons were obvious and range from “crowding-out” the private sector as Saudi banks lent more to the government and thus reduced lending to the private sector, as well as the government still attracting significant investor lending interest at competitive prices.
The DMO has also endeavored to spread its debt across the curve by opting for longer maturities in a bid to avoid a bunching effect and crowding for refunding, and now has bonds maturing in 20, 30 and even 40 years.
The Kingdom is a latecomer to the sukuk market, having issued its debut global sukuk in April 2017, with a domestic sukuk following in July 2017 after the DMO established the unlimited Saudi riyal-denominated sukuk program.
In the first three months of 2020 the DMO raised SR26.8 billion, while in 2019 the DMO issued 12 consecutive monthly domestic sukuks with an aggregate volume of SR69.8 billion.
In June 2021, the ministry closed its SR8.3 billion issuance with tranches maturing in 2029, 2031 and 2035.
Given the domestic appetite for Islamic financing, the continuing issuance of government sukuks is assured.
The international debt program has been an unqualified success in the face of volatile oil prices and the pandemic, with multiple international issuances that were significantly oversubscribed, such as the $7.5 billion Jan. 2019 Global Medium Term Note Program of 10-year and 31-year maturities, with the order book receiving $27.5 billion interest.
In April 2020 the ministry’s issuance of $7 billion bonds was seven times oversubscribed at around $54 billion, with the $7 billion issuance spread over three tranches in five, 10- and 40-year maturities.
During January 2021, a further $5 billion was raised which was four times oversubscribed at around $22 billion, with the maturities of tranches set at 12 and 40 years.
The international debt program was not just confined to the US dollar as in Feb. 2021, the DMO issued its €1.5 billion ($1.76 billion) three- and nine-year notes which were three times oversubscribed to more than €5 billion.
Given an uneven EU economic recovery and the EU’s own domestic borrowing requirements, the DMO’s foray into the Eurobond market was a successful achievement. Other foreign currency loan options are possible in the future, particularly in the Chinese yuan, with China increasingly advocating the use of its national currency for both trade and lending to preferred international partners, especially in the energy sector.
The attractive investment appetite for Saudi debt, albeit at increased yields, has also prompted both the PIF and Saudi Aramco to consider raising international debt in their own name, with Aramco leading the way.
Aramco made its debut in 2019 by raising $12 billion after receiving more than $100 billion in orders, spread out over many tranches. It has recently successfully renegotiated and extended a $10 billion one-year loan it raised in May 2020 at better terms, and a 2021 Aramco oil pipeline sale deal for $12.4 billion was backed by nearly $10 billion in debt underwritten by eight banks and subsequently syndicated to an additional 10 banks.
Not to be outdone, the PIF has taken out a $15 billion banking facility, to add to the $11 billion five-year facility in 2018 and the expectation is that, like Aramco and the DMO, the PIF could now turn to the international bond market to meet its ambitious national mega projects.
In summary, from being a reluctant bystander in the international capital market, Saudi Arabia has dramatically and professionally made its impact on the world’s debt market and will continue to do so, irrespective of gyrating oil prices.
• Mohamed Ramady is a former senior banker and professor of finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.
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