World Economy

Saudi Arabia Cashes In on Record Bond Sale

Saudi Arabia Cashes In on Record Bond SaleSaudi Arabia Cashes In on Record Bond Sale

Saudi Arabia has sold billions worth of sovereign debt in its first global bond sale—the largest ever conducted by an emerging economy. The sale comes as Saudi Arabia’s budget is squeezed by low oil prices.

The oil-rich country earned $17.5 billion from the sale of government bonds, with maturities of five, ten, and 30 years, British bank HSBC said Thursday, Reuters reported.

HSBC was one of the banks underwriting the sale, which was Saudi Arabia’s first in international finance markets. “It was the biggest syndicated issue ever by any country,” said Jean-Marc Mercier, co-director of the debt capital markets division at HSBC.

The bond issue eclipsed the previous record for an emerging market—a $16.5 billion issue by Argentina in April. A source familiar with the Saudi offer said order books totaled $67 billion, coming close to the $69 billion record set by Argentina.

In the days running up to the sale, senior Saudi officials held a series of meetings with top investors in London and the United States to describe the kingdom’s ambitious economic reform plans that include sharp cuts in state spending and a drive to develop non-oil businesses.

Saudi Arabia ran a record budget deficit of $98 billion last year, after a fall in oil revenues, which account for about 70% of the Saudi national government’s income. This year the deficit is projected to come in at $87 billion.

 Reserves Declining

Back-to-back deficits for the past three years have already caused Saudi Arabia’s foreign currency reserves to decline to $562 billion in August from $732 billion at the end of 2014.

London-based Capital Economics said in a briefing paper that Saudi cash reserves were now “unlikely to fall much beyond their current level in the coming years,” because the bond issue will finance around a third of next year’s budget deficit, and almost all of the current account shortfall.

“This should dampen any lingering concerns that the riyal will be devalued. The government’s debt-to-GDP (gross domestic product) ratio will rise as a result of the bond sale, but given its low starting point, it is hardly on a worrying path,” Capital Economics said.

The success of the Saudi bond sale was mostly due to high investor demand as a result of ultra-low interest rates at a global scale. Investors looking for yield can now enjoy a coupon of 2.375% on the five-year Saudi bond, and 3.25% for the 10-year debt. The 30-year debt pays 4.5%.

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