Saudi bond sale invites market scrutiny
Saudi Arabia’s US$17.5 billion debut bond sale to international investors has brought the world’s largest holder of oil reserves a step closer to assuming a bigger role in global financial markets.
Traditionally closed off to international investors, and even most visitors, the kingdom has also over the past year and a half opened its stock market to the outside world and outlined an ambitious plan to make itself less dependent on oil revenue by raising taxes and partially selling off state assets such as its crown jewel, Aramco, the world’s biggest oil producer.
At the same time, it is extending its reach deeper into western world investments, including a $100bn joint technology fund with SoftBank of Japan.
Taken together, these moves will force it to raise the bar on the level of financial and economic disclosure needed to help investors gauge the value of its assets.
“It’s an important step because what are you effectively doing by issuing a bond is not just that you raise capital to deal with the deficit, but you are exposing yourself to the price mechanism of international markets,” said Steen Jakobsen, the chief economist and investment officer at the Danish securities brokerage Saxo Bank.
“So there is an acceptance that going forward you have to be more accountable to international demands for transparency and statistics.”
The debt sale was split into three tranches of five, 10 and 30-year bonds. The country sold $5.5bn of the five-year tranche, $5.5bn of the 10-year and $6.5bn of the 30-year with total demand amounting to $67bn.
The five-year was launched at 135 basis points over US Treasuries, the 10-year tranche at 165 bps over and the 30-year tranche at 210 bps over.
“This benchmark deal was critical on many fronts, it helps the Saudi government plug part of the deficit through international markets bond funding, import external dollar liquidity and relieve some of the domestic liquidity issues,” said Mohamed Jamal, the managing director of capital markets at Waha Capital, who oversees more than $300 million in mostly Middle East and North African stocks and bonds.
Mr Jamal said that, more importantly, the sale would help create a yield curve that would make it easier for Saudi banks and corporations to tap the bond market over the next few months.
The urgency in Saudi Arabia to reform its economy is palpable as the government relies on sales of crude to fund more than 75 per cent of its budget and the deficit is understood to be between $80bn and $100bn this year.
The Saudi budget deficit widened to 14.8 per cent of GDP last year from 2.3 per cent in 2014, according to ratings agencies. Since the summer of 2014, oil has shed more than 60 per cent of its value.
At the heart of the country’s economic transformation plan is reducing the nation’s reliance on revenues from oil and coming up with new ways to raise money through taxes, such as VAT, and privatisations. The planned measures would raise at least an additional $100bn a year by 2020.
Since Saudi Arabia issued price guidance for its securities on Tuesday, Qatar’s 2046 bonds have jumped, driving the yield 11 basis points lower. Yields on Bahrain’s 2044 notes have fallen 35 basis points, while those on Dubai’s 2043 debt have declined eight basis points, according to data compiled by Bloomberg. The yield on Saudi Electricity Co’s 2044 bonds has tumbled by 45 basis points.
Saudi Arabia’s own bonds have gained on the first day of trading. The five-year securities rose by 0.60 cents on the dollar at 12.55pm local time yesterday, the 10-year notes added 0.87 cents and the 30-year bonds 1.29 cents, according to bid data from Bloomberg.
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Updated: October 20, 2016 04:00 AM