By Nolan Abramowitz
The latest news from emerging markets is the debut of the $17.5 billion bond deal Saudi Arabia offered to investors on Wednesday. Saudi Arabian officials now recognizing the need for economic reform are increasing cash flows to withstand the downturn in oil prices. While the original debt deal was forecasted to be within $10-$15 billion, extremely high demand from investors pushed the total order book to over $60 billion, causing the raise in price. The debt was primarily sold to private placement US-based investors and to other Asian institutions.
With high demand pushing Saudi Arabia’s yields below initial marketing plans, investors are betting suspected oil price rises will accelerate growth in the kingdom’s private sector. The bonds will now pay out yields of 2.58%, 3.4%, and 4.62% for the 5, 10, and 30 year notes respectively. Moody rated the offering as A1 investment grade bonds with a stable outlook.
Although richer than many other petrostates, Saudi Arabia’s reliance on oil has pushed its deficit in 2015 to nearly $100 million. The kingdom’s struggle to meet its operating expenses has forced intense cost cutting procedures such as reducing wages for public workers. Saudi Arabia’s economic growth relies so heavily on subsidies that cutting costs could come at the expense of the private sector that is already failing to provide sufficient jobs for the work force. The kingdom is also targeting to balance its budget by the year 2020. The deficit crisis could come to an end quicker than anticipated if the Organization of the Petroleum Exporting Countries (OPEC) is able come to a new production agreement at their November 30th meeting. Oil prices have recently reached over $50 per barrel after news of an output deal between OPEC and non-OPEC suppliers surfaced.
Currently, petroleum accounts for 75% of Saudi Arabia’s revenue. A new economic reform plan called “Vision 2030” aims to diversify the country’s economy into industries such as mining, finance, and technology to make it less reliant on oil revenue. This new plan, along with the Saudis’ commitment to aggressively balance their budget, makes most investors extremely confident about the bond offering.
With treasury bonds in the United States offering yields below 3% at all maturities, the high demand for the Saudi Arabian above-average returns is logical. Saudi Arabia is a rich country and oil prices have recently hit a one year high. On the other hand, the kingdom is entangled in a volatile region and some investors believe the yields were not high enough for a country that must undergo dramatic economic changes and has not been fiscally transparent.