Saudi Arabia has borrowed $4 billion from local markets in the past year, selling its first bonds for eight years as part of efforts to sustain high levels of public spending as oil prices slump.
Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency, said the government would use a combination of bonds and reserves to maintain spending and cover a deficit that would be larger than expected, Reuters reported.
“We expect to see an increase in borrowing,” he said, according to a report in the economic daily Al-Eqtisadiah newspaper over the weekend. Analysts have estimated a deficit of about $130 billion this year. The government, which had not tapped bond markets since 2007, has been dipping into its large foreign reserves, which peaked at $737 billion last August, to sustain spending on wages, special projects and the Saudi-led air war on Yemen. It has drawn down $65 billion since oil prices fell.
Bonus payouts for state employees and the military made by the new king, Salman bin Abdulaziz Al Saud, have placed further pressure on state coffers. “Reality is hitting home, and necessity is also hitting home,” said John Sfakianakis, director for the Persian Gulf region at Ashmore, a fund manager.
Saudi Arabia needs an oil price of $105 a barrel to meet planned spending requirements, but the average price for the year is estimated at $58 a barrel, he said. “If the government continues business as usual and draws down like this it will deplete reserves faster than expected, by the end of 2018 or early 2019,” added Sfakianakis.
The issuance of domestic bonds should ease the rate of drawdown on Sama’s overseas assets, which declined to $672 billion in May.
The domestic bond program marks a shift in strategy as the sustained slump in oil prices takes its toll on Saudi finances.
Analysts initially doubted that the government would respond to the fiscal challenge by borrowing, seeking to avoid the parlous conditions of the state coffers in the late 1990s when domestic debt had risen to about 100% of gross domestic product. Saudi domestic debt had fallen to 1.6% of GDP at the end of 2014.
