Saudi Arabia is holding out the prospect of a role in its first international sovereign bond to banks that participate in a loan to the government, two people with knowledge of the plans said.
Banks were briefed that the largest lenders on the loan, which may be as much as $10bn, will also probably be appointed to arrange the bond, the people said, asking not to be identified as talks are private. Verus Partners, a boutique advisory firm set up by former Citigroup Inc bankers Mark Aplin and Andrew Elliott, is advising the Saudi government, the people said.
Saudi Arabia is looking for other sources of funding to plug a budget deficit that is expected to reach 17.8% of economic output this year, according to Riyadh-based Jadwa Investment Co. So far the government has mostly relied on a domestic bond programme and drawing down foreign reserves held by the central bank. It raised 98bn riyals ($26bn) from selling bonds to local institutions last year, and will probably sell about 120bn riyals of debt in 2016, Saudi Fransi Capital said in October.
“It’s not uncommon in this industry to have a preference for banks that are supportive by extending their balance sheet’s lending capacity to also get other business,” Apostolos Bantis, a Commerzbank AG credit analyst in Dubai, said yesterday by phone. “Sooner or later Saudi Arabia will have to access the international bond markets.”
The country hasn’t publicly acknowledged the international bond plan, which was first reported by the Financial Times in November. No mandates on a bond issue are guaranteed and the kingdom may decide not to go ahead with the sale, the people said. An international bond would be the nation’s first, according to data compiled by Bloomberg.
The kingdom is taking unprecedented measures to shore up its public finances and reduce the economy’s reliance on oil. The government has raised fuel prices and trimmed spending in this year’s budget to narrow the deficit. The Washington-based International Monetary Fund expects economic growth in Saudi Arabia of 1.2% this year, its slowest pace since 2002.
Raising money through a bank loan is a better proposition for Saudi Arabia than a bond sale at the moment, as it will probably get better pricing and avoid public scrutiny and challenging questions from investors, according to Commerzbank’s Bantis.
The Ministry of Finance in Saudi Arabia didn’t immediately respond to calls and e-mails seeking comment. Verus declined to comment.