Saudi Arabia USD$17.5 billion bond sale this week has topped Argentina’s USD$16.5 billion issue in April as the largest emerging market bond transaction ever. Bids received for the Saudi bonds were reported to be in the order of USD$70 billion, which is coincidentally about the same as received in the Argentinian sale. The level of demand led to final yields being set at around 25bps less than initial guidance. It was a three tranche affair which comprised USD$5.5 billion worth of 2021 bonds at Treasury’s + 167bps, USD$5.5 billion 2026 bonds at Treasury’s + 170bps and a USD$6.5 billion 2046 bonds at Treasury’s + 215bps. Saudi Arabia has an A- (stable) rating from S&P Global Ratings.
Why are the Saudis borrowing money? Saudi Arabia has long been a middle-Eastern powerhouse on the back of the world’s largest oil reserves but in recent years sharply falling oil prices, profligate spending, funding wars in neighbour states have led to a budget deficit of around 15% of GDP. This rapid spending has occurred in quick time. Prince Mohammed has overseen the most dramatic changes in the nation state over the past 50 years.
Unlike Argentina, Saudi Arabia has not defaulted on its bond obligations in the past. Perhaps because it has only started issuing bonds in the last five years. Its status as one of the world’s larger creditor nations has meant it has had little cause in the past to issue bonds. That was until the price of oil fell to level where the oil-revenue dependent country started running budget deficits and current account deficits. In either case, it means running down reserves or issuing bonds.
