Saudi Arabia’s plans to bolster its finances are taking on a new sense of urgency as lower oil prices put the economy under more strain than at any other time in the past decade.
In recent weeks, the country raised a $10 billion loan, clamped down on currency speculators and informed banks of plans to raise as much as $15 billion in its first international bond sale, people with knowledge of the matter said. It’s also said to be contemplating "I-owe-you" to pay contractor bills and hired HSBC Holdings Plc banker Fahad Al Saif to set up a new debt office, Bloomberg reported.
The speed of the measures underscores Deputy Crown Prince Mohammed bin Salman’s urgency to shore up the country’s finances as an era of oil-fueled abundance falters. Though currency reserves remain strong—among the world’s largest—net foreign assets are at a four-year low after declining for 15 months in a row and the kingdom may post a budget deficit of about 13.5% of economic output this year.
“The pace of the decline in Saudi Arabia’s foreign assets is faster than in previous oil downturns and the period over which they’ve been falling is longer,” Raza Agha, VTB Capital’s chief economist for the Middle East and Africa, said by e-mail. “This generates a real sense of urgency to get the ball rolling in raising external funding.”
Windfall Continues
Five years ago, oil surged to more than $100 a barrel, adding billions of dollars to the country’s reserves. The windfall allowed the kingdom to slash its debt and post an average budget surplus of 8.2% between 2000 and 2012, according to International Monetary Fund data. Now, with crude having tumbled about 50%, the country is moving to sell assets and find other ways to raise funds.
Net foreign assets at the central bank fell 1.1% to $572 billion in April after slumping by $115 billion in 2015, when the kingdom ran a budget deficit of nearly $100 billion. Holdings in US stocks slumped to $52.4 billion in June 2015, from about $78 billion a year earlier, according to a report from the US Treasury Department.
The next step is turning to the international markets for funding. In April, it sealed a $10 billion loan—it's first in at least 15 years—from a group of US, European, Japanese and Chinese banks, people familiar with the matter said at the time. It’s also weighing the sale of as much as $15 billion of bonds this year, separate people said last week.
In addition to the loan and bond sales, Saudi Arabia is also looking at less conventional methods to help absorb the shock of lower oil prices.
The country is considering IOUs to pay outstanding bills with contractors and conserve cash, people briefed on the discussions said last month. The kingdom has delayed payments to government contractors working on infrastructure projects for six months or more as the government seeks to preserve cash, people aware of the matter said.
Authorities are also taking steps to protect the currency regime amid speculation the country will have to abandon the riyal’s three-decade-old peg to the US dollar. Last week, the Saudi Arabia Monetary Agency ordered banks to stop selling dollar-riyal forward structured contracts immediately, following a similar order in January, people aware of the matter said.
As Saudi Arabia undergoes a shakeup under the deputy crown prince and the government navigates the worst economic slowdown since the financial crisis, further measures could be introduced, according to some analysts.
Saudi Arabia's National Transformation Plan, a pivotal element of the "Vision 2030" reforms announced in April by Prince Mohammed, will be put before the cabinet for approval on Monday, Reuters reported.
The wider reforms are expected to include subsidy cuts, tax rises, sales of state assets, a government efficiency drive and efforts to spur private sector investment.
