The Strategist

Saudis are already spending funds raised on bond sale

10/20/2016 - 14:36

Just yesterday, Saudi Arabia raised held $ 17.5 billion during placement of bonds. All the money were immediately used to repay debts.

Iqbal Osman
Iqbal Osman
Once it became clear that placement of bonds was successful, the Saudis have begun to pay off debts to the government contractors who were not paid for several months. This, in turn, negatively affected investor sentiment and increased risk of non-payment crisis.

According to estimates of Capital Economics, total nominal amount of money raised during record bond issuance in emerging markets will allow funding about a third of the state budget deficit in the next year. The money will also be helpful to close almost all gaps in the Kingdom’s current account, that is, foreign exchange reserves are unlikely to fall significantly in the coming years.

Indeed, Riyadh does not waste time in vain, preferring to spend new money.

According to Bloomberg, Saudi Arabia has already started to pay out debts to several large construction and other companies that have been waiting for money for several months. Among them is Binladin Group, which employs several tens of thousands of workers. The agency’s sources say that 30-40% of the debt will be settled before the end of the year, and the debt will be fully repaid in 2017.

Saudi Arabia has started to delay payments in the last year, when the deficit amounted to about 15% of GDP as a result of falling oil prices. Austerity measures has been scaling the kingdom's economy down in the last three months of 2015 and in the I quarter of this year. In fact, in Riyadh had no choice but to enter the international debt markets.

The government gradually began to extinguish its debt to the contractors already in the past month. Apparently, Riyadh was quite confident in the successful placement. Yet the victory is only the first step. In 2020, the authorities intend to raise more than $ 100 billion in the form of non-oil revenues, including through introduction of VAT.

The market positively reacted to Riyadh’s plans to raise funds in March, when the country announced possibility of placement. Indeed, investors rushed to buy insurance against default of Saudi Arabia, yet the CDS prices was lowering at the time.

The IMF believes that the austerity measures could be relaxed in the next year. This, according to the fund, will result in non-oil growth to 2.6% compared with 0.3% in 2016. However, fiscal consolidation will continue in the next 5 years.

Although most of the proceeds will be used for debt repayment, Saudi Arabia is also likely to try to stabilize the banking sector at the expense of the money. This assumption also mitigates concerns about impending devaluation of Riyal.

Capital Economics believes that for now, there is no reason for the devaluation. According to the company, growth of the debt-to-GDP ratio after placement of bonds will not be a problem, given the initially low debt burden.

At the same time issuance of bonds will make Saudi Arabia more attractive for different types of investors, including those who are focused on long-term investments.