Saudi Arabia Taps Bond Market As Low Oil Prices Create Deficit

Saudi Arabia has issued its first sovereign bonds since 2007 to help fund a widening budget deficit caused by continued spending amid low oil prices.

It plans large issues of five-, seven- and 10-year bonds, which will go a long way toward establishing benchmarks for corporate debt.

The kingdom issued $4 billion of bonds in July and plans an additional $20 billion or more of bond issues by the end of this year. The first issue of seven- and 10-year conventional bonds sold at yields of 2.57% and 2.88%, respectively.

William Jackson, senior emerging markets economist at Capital Economics, says: “The immediate reaction to the bond issuances seems to be a suggestion that the authorities have become concerned by the pace at which they have been drawing down their reserves. While there may be something to these concerns, for now, at least, we think the decision to issue debt has more to do with deepening Saudi Arabia’s domestic financial market.”

Bond issuance should continue in the future, since the government is likely to run large budget shortfalls over the next few years, Jackson says. With the bond proceeds, the government won’t need to tighten fiscal policy for the next five to 10 years, he adds.