Saudi Arabia's Government Debt to Soar to $181 Billion

Published April 1st, 2019 - 06:38 GMT
Economy expands in Q4 on boost from crude; non-oil growth slows. (Shutterstock)
Economy expands in Q4 on boost from crude; non-oil growth slows. (Shutterstock)

Saudi Arabia is set to issue $31.5 billion in debt this year to help finance its budget deficit even as the largest Arab economy showed signs of an upturn in the fourth quarter 2018 - at its fastest rate since early 2016 - due to an expansion in the oil sector.

Saudi Arabia's deficit funding requirements for this year are estimated at $35 billion, which will be funded with an approximate net debt issuance of $31.5 billion, while the rest will come from government deposits at the central bank, the country's Debt Management Office (DMO), part of the Ministry of Finance, said on Sunday.

With the borrowing, the kingdom with around $150 billion in outstanding government debt will see its outstanding debt increasing to $181 billion, corresponding to 21.7 per cent of gross domestic product.

Over the past few years, faced with a fast draining state coffer amid oil price drop, the world's largest oil exporter has been borrowing extensively to meet its fiscal needs.

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Currently, 54 per cent of its outstanding debt is in local currency and the rest denominated in greenback.

DMO said foreign funding this year would be positioned in a way in which (Saudi Arabia) could secure most of its funding in the first quarter to reduce exposure to market risks and to allow government-related issuers to tap the debt markets. In January, the kingdom issued $7.5 billion in international bonds.

The new debt issue plan has been revealed at a time when Saudi Aramco, the state-owned oil giant, is expected to issue its first bonds in the international markets.

In a statement, the DMO said this year it would try to contain the government's outstanding debt exposure to interest rate risk by reducing the percentage of floating-rate instruments in its portfolio.

At the end of 2018, 73 per cent of Saudi debt issues had a fixed rate and 27 per cent had a floating rate. By the end of 2019, the government wants to increase fixed-rate debt to 78 per cent of its portfolio.

Saudi Arabia's fourth-quarter gross domestic product grew by 3.59 per cent from a year earlier as the kingdom posted an annual growth of 2.21 per cent in 2018.

"The oil sector led the recovery in the final quarter, reflecting stronger production, particularly at the beginning of the quarter. We expect the headline growth figure to moderate in 2019 as Saudi implements oil production cuts," said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

In 2017, the economy shrank for the first time since the global financial crisis almost a decade earlier. Since then, Saudi economy has suffered in the wake of low oil prices and austerity measures.

James Mathew, Group CEO (UAE & Oman) of Crowe, a leading global accounting network, said spurred by an expansionary budget Saudi growth would rebound in the coming years despite oil price fluctuations on the back of an on-going reform drive.

"The kingdom is also on track to achieve its goal of balancing its budget by 2023," he said. 

Aramco to lead

The impending buy out of a majority stake in Saudi Basic Industries Corp by Saudi Aramco from the Saudi sovereign wealth fund, Public Investment Fund for $69.1 billion is expected to boost economic growth as the sovereign fund gains more firepower to proceed with its plans to create jobs and diversify the largest Arab economy beyond oil exports, analysts said.

Analysts at S&P Global Ratings see the acquisition of the world's fourth largest chemicals company as a strategic move by Saudi Aramco to expand its downstream operations.

"We believe the deal will help add value to the crude oil it produces and expand its petrochemicals business, where demand is increasing faster than for crude oil."

Arqaam Capital said in a research note the acquisition is expected to boost credit growth, "as corporate activity on increased award momentum continues to improve particularly towards the end of the year and potentially on loans from Aramco to fund the purchase of Sabic."

Bank of America Merrill Lynch's analysts said Saudi 2019 budget is expansionary as the pace of austerity eases, spending increases. "Higher spending is likely to put a floor under non-oil private sector growth, but the impact of recent political uncertainty and labor market reforms suggests no major rebound."

They expect growth to have bottomed out at the expense of looser fiscal policy. The dollar peg is likely to hold on the back of still-high savings and oil prices.

"A prolonged period of low oil prices, fiscal reform slippage, devaluation, political succession and regional geopolitical threats remain the risks. An exodus of expatriates and their families due to fees and Saudisation could weigh on private consumption. Energy policy is likely to remain geared toward supporting oil prices," BoA Merrill Lynch analysts said.

By Issac John 


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