Investors demanded the highest rates of interest Saudi Arabia offered at its first sale in a decade of notes with floating-rate coupons, as the nation seeks to plug a widening budget deficit, two people with knowledge of the deal said. The Gulf nation sold an unspecified amount of five-, seven- and 10-year notes, said the people, who asked not to be identified because the information isn’t public. The government’s decision to raise the funds after Standard & Poor’s cut its credit rating two levels to A- last week contributed to the higher borrowing costs, said Anita Yadav, head of fixed-income research at Emirates NBD.
It was “partly due to slight negative sentiment generated from a multi-notch downgrade of the sovereign’s credit rating between the guidance being sent out and the final pricing being set,” Dubai-based Yadav said yesterday by phone. Tighter liquidity at domestic banks also affected pricing on the debt, she said.
Saudi Arabia is taking unprecedented measures to shore up its public finances and wean the economy off oil amid the plunge in crude prices. The government has raised fuel prices and trimmed spending to narrow a deficit that last year may have been the widest since 1991. Yesterday’s bond sale marks the first time the kingdom has sold floating-rate notes since October 2006, according to the central bank’s website.
Officials at the country’s finance ministry weren’t able to respond immediately to calls and e-mails seeking comment. Saudi Arabia will probably sell about 120bn riyals ($32bn) of debt in 2016 to support its finances after oil’s slump, Saudi Fransi Capital said in October.
The riyal-denominated five-year notes were priced at 25 basis points less than the three-month Saudi Interbank Offered Rate, said the people familiar with the transaction, compared with an indicated range of 30 to 25 basis points less.
The seven-year notes yielded 10 basis points less than three-month Saibor, while the 10-year notes were priced five basis points above the interbank rate, the people said. Both segments paid coupons at the maximum range indicated, they said.
S&P cited the decline in oil prices when it cut the kingdom’s rating February 17, saying it will have “a marked and lasting impact” on the economy. The Washington-based International Monetary Fund forecasts growth of 1.2% this year, the slowest pace since 2002.
SAMA, as the central bank is known, is also easing rules on bank lending rules to boost credit growth, people with knowledge of the matter said this month. Banks were told they can lend the equivalent of 90% of their deposits, up from an earlier limit of 85%, the people said.
“I expect that liquidity in the Saudi banks will continue to tighten this year as a result of lower oil deposits from the government,” Yadav said. Policy makers are “likely to continue to take measures to support domestic liquidity, including selling foreign assets and bringing the proceeds onshore.”