When Saudi Arabia slipped into deficit in 2014 following a slump in oil revenues, the government took familiar steps to bridge that shortfall, drawing down on its reserves and selling riyal-denominated debt to local lenders.
The domestic bonds squeezed liquidity, sending the Saudi interbank rate soaring and crimping private sector activity just when the government needed corporates to help fill the economic void left by crude price collapse. So great was the budget deficit in 2015 — a record $98 billion — that the Kingdom’s foreign assets were being spent at an alarming rate.
So began the need to tap international debt markets in what became an unprecedented move for Saudi’s legendarily cautious decision makers who, unlike their neighbors in Qatar and Dubai, had long eschewed borrowing abroad.
Saudi first issued development bonds and then treasury bills in the late 1980s and early 1990s to finance its fiscal deficit, according to the IMF, halting these sales when its finances improved.
In the late 1990s, the government then drew down some of its reserves and borrowed locally as it again moved into deficit, but this year the Kingdom finally opted to borrow big on international markets.
First, it obtained a $10 billion syndicated loan in April and then in October it sold $17.5 billion of international bonds, the largest ever emerging market bond issue.
The bonds were nearly four times oversubscribed and attractively priced; a $5.5 billion five-year tranche was launched at 135 basis points (bps) over US Treasuries, a $5.5 billion 10-year tranche at 165 bps over, and a $6.5 billion 30-year tranche at 210 bps over, Reuters reported.
“Over the past two to three years, Saudi faced a number of challenges in pricing and issuing bonds to the international market, so had been dependent on their own reserves plus local bank borrowing,” said a regional banking source.
Consequently, most of Saudi Arabia’s recent deficits had been funded by its reserves. Its net foreign assets fell from $724 billion at 2014-end to $609 billion a year later. “If things had continued that way in a year or two the reserves would have fallen by more than half, which made them very nervous,” added the banker.
In the 10 months to last October, in addition to its international borrowings, Saudi issued SR90 billion of government bonds and drew down SR272 billion from reserves, according to Saudi Fransi Capital.
This tallies with the National Transformation Program (NTP), which aims to increase government debt as percentage of GDP to 30 percent by 2020. Government debt will be 19 percent of GDP this year, London’s Capital Economics estimates, up from 5.9 percent in 2015 and 1.6 percent in 2014.

More bonds
Saudi Arabia is widely expected to tap international debt markets again in 2017, despite rising US interest rates making borrowing more expensive.
“There’s still a lot of liquidity in the global markets and the pricing and demand for the bond shows strong investor confidence in Saudi Arabia,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“Given Saudi Arabia’s low debt levels, it’s important for it to continue to use debt to finance the deficit.”
Depositing the proceeds from international bond sales with Saudi banks should help reduce local liquidity pressures; following October’s record issue, the government halted monthly local debt sales until next year.
“We expect local bond sales to make up the bulk of the budget financing next year,” Capital Economics wrote in a note.
“External financing conditions are likely to deteriorate next year … so while we expect another dollar bond sale in 2017, it is almost certain that it won’t match this year’s bumper sale.”
Saudi Arabia is also likely to issue sukuk next year, predicts John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh.