The country’s sale of bonds worth SR15 billion ($4 billion) to local banks this year was welcomed by Riyadh-based economists as a strategic move that could reshape its financial markets.
While a few state agencies or state-controlled firms have issued bonds in the past few years, the government’s last sovereign development bond was issued in 2007, Arab News reported.
“For the development of debt capital markets, issuance should continue and involve a variety of buyers,” said John Sfakianakis, Middle East director at Ashmore Group.
His remarks came as Saudi Arabian Monetary Agency Gov. Fahad al-Mubarak indicated increased government borrowing in coming months.
Sfakianakis added: “It’s an important step motivated by balancing the fiscal needs of the economy by tapping into alternative sources of revenues besides reserve assets.”
He said: “The pace of the issuance of debt will determine the fiscal shortfall that would be funded by reserve assets. It’s expected that the budget deficit would amount to more than SR400 billion.
“Issuing debt is healthy but also needed given that it reduces reserve depletion. Equally important, it would eventually help deepen the debt market which would help monetary policy transmission and have a benchmark yield curve.”
The country faces a huge budget gap this year, which al-Mubarak said was expected to exceed the originally projected SR145 billion. The International Monetary Fund has estimated the deficit will be about 20% of GDP, or around $150 billion.
Fahad M. Alturki, chief economist and head of Research at Jadwa Investment, commented: “The government is now expected to issue debt as part of its deficit financing strategy. This change of strategy comes as the country takes advantage of its solid credit profile, which has been affirmed by the major rating agencies.”
He added: “While we expect the government to maintain its expansionary fiscal strategy, the net effect of lower oil prices and higher oil output is a deeper deficit on the fiscal budget.”
Alturki said: “The fall in oil revenues will lead to a fiscal deficit of SR397 billion, or 15.6% of GDP in 2015. The current account is also heading for its first deficit since 1998, although it is expected to be small, at $23.1 billion, or 3.4% of GDP.”
