Finance

Saudis Try to Sell $17.5 Billion Bonds

It seems that Saudi Arabia is attempting a sale of an unprecedented scale from the standpoint of a nation of that size. They seek to sell $17.5 billion in sovereign bonds, most likely in order to compensate for the losses they suffered due to declining oil prices as well as war with Yemen. In any case, many analysts remain skeptical regarding the success of a transaction of this magnitude, and binary options brokers second that, for the most part.

The Saudi bonds

These bonds are denominated in U.S. currency and are due in five years. Needless to say, they yield substantially more than comparable U.S. Treasuries. Specifically, they offer 140 basis points on top of these, while the spread on bonds due in ten years is 170 points. Finally, those that will mature in thirty years offer the biggest spread of 215 basis points, although none of these information has been officially confirmed.

The previous record holder was Argentina, who sold $16.5 billion six months ago, which was considered a bit much for a developing nation, but their financial situation certainly merited such an act. Although, the finances of Argentina and Saudi Arabia are not quite comparable. The last year’s Saudi budget fell short roughly $97 billion. This translates to about 15% of their annual GDP, and is the most likely cause of numerous cuts in public spending that affected the lives of average Saudis in 2016.

They have seen their subsidies, wages and spending all decline and it seems the troubles are far from over at this point. The government in Riyadh is probably feeling the rising tensions, so the sale of bonds was probably the least painful solution, albeit a short-term one. This massive cash infusion would be a lot more painful if it weren’t for the fact that U.S. elections are just around the corner and the FED rate is expected to increase afterwards.

Who will pick up the tab?

As for the buyers of these bonds, it seems Saudi Arabia has been busy lobbying all around London, New York, Boston and Los Angeles in a desperate attempt to persuade the public that their kingdom is merely trying to diversify its economy which is heavily reliant on one source of income – in this case, oil. It may have succeeded in building up a $650 billion economy on oil revenue, but times are changing much faster than anyone in Riyadh expected.

During these sessions, the Saudis adamantly avoided to talk about oil prices, to a suspicious extent, but this did not stop major investors including Allianz Global from taking part in these talks. Still, buyers aren’t exactly flocking to this deal. For one, they are sceptical regarding the ability of Saudi Arabia to honour its agreements in ten or thirty years. Also, the way the delegation keeps dodging key issues such as crude oil prices are arousing quite a bit of suspicion. And finally, the price of these bonds is deemed far too steep, especially for an economy which is in dire straits.

A bond too far

There are cheaper bonds out there to be had, and the deal they offer is a lot more appealing than this. So, it is unclear as to how much success can the Saudis expect with this deal. According to anonymous sources, Saudi Arabian officials are hoping to get at least $10 billion out of this sale, so this may be a tactics to give them breathing room during the actual deal making.

It should be noted that Saudi Arabia is not the first country in the region to resort to bonds as a means to supplement a huge hole in their budget. For instance, Qatar got $9 billion last May, Abu Dhabi alone managed to scrounge up $5 billion a month before that and even Oman managed to get their hands on some $4.5 billion. However, none of these countries are currently participating in a military conflict and their ability to repay their debts are not being questioned for the time being.

Conclusion

With $73 billion in government debt, Saudi Arabia is in for some very tough times. Even if it recovers, the price of oil, which is a sort of a taboo for the Saudis right now, will not rise fast enough or high enough for them to compensate all the losses they have suffered. At least not that easily. The riyal has not been doing too great and a massive drop in terms of deposits have made liquidity of certain banks in the country questionable to say the least. We’ll see how this crisis unfolds.

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3 Comments

  1. August 16, 2017 at 10:09 am — Reply

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