Aug 6 2015 at 10:43 AM Updated Aug 6 2015 at 2:12 PM

Saudi Arabia to tap markets for $US27b as low oil strains finances

by Simeon Kerr and Anjli Raval
Saudi Arabia is returning to the bond market with a plan to raise $US27 billion by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the largest oil exporter.

Bankers say the kingdom's central bank has been sounding out demand for an issuance of about 20 billion Saudi riyals ($US5.3 billion) a month in bonds - in tranches of five, seven and 10 years - for the rest of the year.

Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency, said in July that Riyadh had already issued its first $US4 billion in local bonds, the first sovereign issuance since 2007. But the latest plans represent a significant expansion of that programme, which bankers believe could even extend into 2016, given the outlook for the oil price.

Saudi Arabia's resort to further domestic borrowing highlights the challenges facing the region's largest economy amid one of the steepest falls in the oil price in recent decades. Brent, the international benchmark, has dropped from $US115 a barrel in June last year to about $US50 this week.

Oil's decline accelerated last November when OPEC, the producers' cartel, decided not to cut output, a significant departure from its traditional policy of trimming production to prop up prices. Saudi Arabia said it was an attempt to defend market share.

But the decision to ride out a sustained period of lower prices has put a huge strain on the finances of leading oil exporters, including Saudi Arabia, which requires an oil price of $US105 a barrel to balance its budget.

The kingdom has drained $US65 billion of its fiscal reserves to maintain government spending since the oil price plunge began. SAMA has $US672 billion in foreign reserves, down from a peak of $US737 billion last August. The plan to resort to capital markets, if confirmed, demonstrates the priority Riyadh is placing on maintaining government spending, despite the pressure cheap oil is putting on its budget. The monthly bond issuance plan would only cover part of the deficit, which economists estimate will reach 400 billion Saudi riyals this year amid falling revenues and continuing high expenditure on infrastructure projects, public sector wages and the war in Yemen.

"This is all about rebalancing away from the reserves - using some debt to help make up the budget deficit," said one banker aware of the plan.

The bond plan has echoes of the 1990s, when Riyadh issued local banking debt via Saudi government development bonds. At one point at the end of the 1990s, Saudi debt reached 100 per cent of gross domestic product. It was only when oil prices began their sharp ascent in the early 2000s that the kingdom's debt levels began to come down.

Sama, which has yet to announce the plans, was unavailable for comment.

Ali al-Naimi, the kingdom's oil minister, flagged in an interview last December that Saudi Arabia could tap the debt market. "A deficit will occur," he told energy publication MEES. "But . . . we have no debt . . . We can go and borrow money and keep our reserves."

Bankers agree that highly liquid local banks are likely to snap up any domestic bond issues this year.

Financial Times