Saudis mull record borrowing binge to offset oil price collapse

Saudi Arabia will rely on the biggest debt program since its debut in international bond markets in 2016 to absorb the shock to the budget from collapsing energy prices and cuts in oil output.

The kingdom could borrow 220 billion riyals ($58 billion) this year while keeping its drawdown from reserves at up to 120 billion riyals, as originally planned in the budget, Finance Minister Mohammed Al-Jadaan said at a news conference late Wednesday. The government is looking at additional spending cuts and may issue as much as an extra 100 billion riyals of debt on top of 120 billion riyals already announced. 

“The kingdom went through similar crises in its history -maybe even worse -and was able to pass through them,” he said. “This is not an exception.”

Although many major economies have met the global downturn by deploying massive stimulus, Saudi Arabia has to tread more carefully as a historic crash in crude prices adds strain to its finances. The government said last month that it planned to raise its debt ceiling from 30% to 50% of gross domestic product as it borrows more to cope with the crises.

The kingdom has already tapped international bond markets twice this year and has borrowed a total of $19 billion from local and international investors, according to data compiled by Bloomberg.

What Our Economists Say...“The reliance on debt is in line with the approach Saudi authorities have taken since 2016. It’s a sound strategy as long as there’s appetite from foreign investors for Saudi debt. But it also comes at the risk of tightening liquidity in the banking system if the government relies excessively on domestic borrowing - as happened four years ago.”

by Ziad Daoud, Chief Middle East economist, Bloomberg Economics

Saudi Arabia’s dollar bonds have sold off this year as the pandemic and the meltdown in oil markets prompted global investors to rush to haven assets such as U.S. Treasuries. The kingdom’s average yields have climbed almost 110 basis points since early March to 3.54%, according to Bloomberg Barclays indexes

Still, its dollar securities are down 4.3% this year, which is much less than the average of 11.5% among emerging-market sovereigns. And the country attracted more than $50 billion of orders for a $7 billion deal last week, showing there’s plenty of demand for its debt.

Saudi Arabia was targeting a fiscal deficit of 6.4% of GDP this year under the assumption that Brent crude would average about $65 per barrel, according to Bloomberg Economics. The government’s budget deficit could widen to 15% of economic output, according to Mohamed Abu Basha, head of macroeconomic analysis at investment bank EFG Hermes in Cairo.

Saudi bank Samba Financial Group anticipates a fiscal deficit of almost 13% of GDP this year, on expectation that overall spending will fall 12% and assuming that Brent averages $36 per barrel. Expenditure cuts are “necessary” given Saudi Arabia’s currency peg, said James Reeve, chief economist at Samba.

“There has been pressure on the Saudi riyal in the forward market and the authorities will be acutely conscious of how their main macroeconomic metrics develop this year and how they might be perceived abroad,” he said. “Thus, we think they will work hard to ensure that their fiscal deficit-to-GDP does not
balloon.”

The fiscal shortfall reached 4.5% last year after peaking at just over 17% in 2016, according to the International Monetary Fund.

Brent is trading around $22 a barrel – far short of the $76.1 the IMF estimates Saudi Arabia needs to balance its budget – leaving officials with limited options to offset economic pain without crippling public finances.

Already under lockdown to contain the spread of the coronavirus pandemic, the world’s largest crude exporter is bracing for a second impact from the oil rout and unprecedented production cuts negotiated by OPEC and its allies.

Without providing details, Al-Jadaan said the kingdom was “looking at additional measures” to reduce government spending. He added that officials expected to save some money during the virus-related shutdown as they spent less on on travel, events and entertainment, and would “delay some spending on projects that are halted now.”

The challenge for officials will be balancing fiscal pressures with the need to support the economy. The government expects GDP for the non-oil private sector to shrink, Al-Jadaan said. He added that was “not surprising because of the precautionary measures” taken to slow the spread of the virus, including a 24-hour curfew in major cities.

Oil has already dropped below levels seen in 2015, when the kingdom first started tapping local banks to help fund the deficit. It also put the brakes on spending at that time by delaying tens of billions of dollars in payments for government contracts. The decision hit foreign and domestic investor confidence, and Al-Jadaan vowed to continue paying contractors on time during this crisis.

The government has announced a slew of measures to aid businesses during the virus shutdown, including a plan to cover 60% of the salaries of some Saudi nationals working at private firms. In total, the state has pledged 177 billion riyals of support, according to the Finance Ministry — though that includes extra allocations for the health sector.

Officials are continuously studying the impact of the stimulus measures and will extend more support if needed, Al-Jadaan said.

“The private sector’s concerns are our concerns,” he said.

(Updates with economist forecasts, comment starting in ninth paragraph)

–With assistance from Abeer Abu Omar and Paul Wallace.