Saudi and foreign businessmen attend the 9th Global Competitiveness Forum (GCF2015) held in Riyadh on January 26. Opec’s biggest oil exporter plans to boost its debt market as the kingdom diversifies its $752bn economy amid falling crude prices.

Bloomberg/Dubai


Saudi Arabia plans to sell as much as 20bn riyals ($5.3bn) of debt on Monday as the Opec producer seeks to plug its budget deficit after oil prices plunged, two people familiar with the matter said.
The Saudi Arabian Monetary Authority is arranging the auction for August 10, part of a wider plan to raise between 90bn riyals and 100bn riyals before year-end, the people said, asking not to be identified as the information isn’t public. The bonds will have tenors of five, seven and 10 years and will be placed with local banks, they said.
Opec’s biggest oil exporter plans to boost its debt market as the kingdom diversifies its $752bn economy amid falling crude prices. With income from oil accounting for more than 90% of revenue, a more than 50% drop in prices in the past 12 months has put pressure on the nation’s finances. Saudi Arabia’s budget deficit may widen to 20% of gross domestic product this year, the International Monetary Fund estimates.
The five-year tranche may be priced between 33 basis points and 38 basis points above similar maturity US Treasuries, the seven-year segment between 39 basis points and 44 basis points and the 10-year securities between 45 basis points and 50 basis points, the people said.
SAMA’s head of public relations didn’t respond to calls seeking comment.
Before this year, the kingdom hadn’t issued securities with a maturity of more than 12 months since 2007. The auction next week will be followed by debt sales of similar amounts each month until the end of the year, the people said.
“Saudi Arabia will be looking at a number of different funding options to cover its fiscal deficit,” Monica Malik, the chief economist at Abu Dhabi Commercial Bank, said by phone from the UAE capital. “The country can take advantage of its low debt levels and liquidity in local banks to borrow cheaply, as well as drawing down government deposits.”
Saudi Arabia’s foreign reserve assets held by the central bank fell for a fourth month to about $672bn in May. Net foreign assets declined more than $50bn since January.
While the sale helps diversify the kingdom’s source of funding, it doesn’t resolve the issues pressuring its budget.
“Saudi Arabia’s fiscal policy has seen little adjustment with respect to the deep plunge in oil prices, and was further weighed by one-off unforeseen spending pressures, such as royal handouts and the Yemen war,” Jean-Michel Saliba, a London-based economist at Bank of America Merrill Lynch, said by e-mail.
King Salman ordered a two-month bonus for public-sector workers and pensioners soon after he ascended to the throne, adding pressure to the budget that was already strained by falling oil prices. Last month, he ordered the distribution of 1.8bn riyals to social security beneficiaries. Meanwhile, military spending is likely to rise as the kingdom leads airstrikes against Shia rebels in Yemen.
Saudi Arabia should take note of how the UAE, which also relies on oil income to fund its federal budget, has coped with the drop in crude prices, according to Simon Kitchen, a strategist with Cairo-Based investment bank EFG-Hermes. The UAE will reduce government expenditure by $3.75bn over the next two years after it cut subsidies on fuel, according to Moody’s Investors Service.
The Emiratis “are preparing for a world of lower oil prices,” said Kitchen by e-mail. While in Saudi Arabia, “there has been no announced effort to address the underlying balance through a cut in spending or by widening the revenue base,” he said.

June foreign reserves fall 1.2%

Net foreign reserves at Saudi Arabia’s central bank fell to 2.492tn riyals ($664.5bn) in June, down 1.2% from May to their lowest level since March 2013, central bank data showed yesterday.
The world’s largest oil exporter has been drawing down its reserves to cover a huge state budget deficit caused by low oil prices. The central bank serves as the kingdom’s sovereign wealth fund, storing its accumulated earnings from oil exports.
Net foreign assets dropped 9.4% from a year earlier in June. They peaked at a record $737bn last August.
They were dropping at faster month-on-month rates earlier this year, but last month the government began covering part of its deficit by selling bonds for the first time since 2007, placing a 15bn riyal issue. This has reduced pressure for the reserves to fall.
The assets are held mainly in the form of foreign securities such as US Treasury bonds - securities totalled $483.3bn at the end of June - and deposits with banks abroad totalling $119.7bn. The vast majority of the assets are believed to be in US dollars. The June data appeared to show a shift in the central bank’s approach. For many months it had mainly been running down its bank accounts rather than selling securities.
But in June, it liquidated a massive $32.4bn of securities while increasing its deposits abroad by $22.9bn.