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Saudi Arabia plans bond deal to help finance budget deficit

Saudi Arabia plans bond deal to help finance budget deficit

RIYADH: Saudi Arabia plans to follow its record-breaking debut on global debt markets with an Islamic bond issue in a sale that could come as early as February. The sharia-compliant sukuk will form part of a pipeline of bond sales to finance the kingdom’s budget deficit and invest in economic diversification away from oil and is likely to appeal to regional investors in the Gulf.

Last year, Saudi Arabia set a record for developing countries with its first sovereign bond sale, attracting $67bn in investor bids for a $17.5bn issue. Not all of the 10 banks appointed to help arrange the initial bond offering are expected to be hired to manage the second transaction, although joint global co-ordinators Citi, HSBC and JPMorgan are in a strong position to be mandated, according to a person connected to the deal. As the world’s largest oil producer, Saudi Arabia has been sharply affected by a collapse in energy prices since 2014 — cutting government spending, raising debt and making plans for the world’s largest initial public offering in state-owned Saudi Aramco to help manage the shortfall. Although crude prices have stabilised at $55 per barrel following a deal between Opec members in November, they are not expected to return to the $100-per-barrel levels seen three years ago. “Diversification is natural for any emerging market, but the fall in oil prices have made it a necessity for exporters like Saudi Arabia,” said Bashar Al-Natoor, global head of Islamic finance at Fitch Ratings. “Lower oil prices have led to a drop in government reserves held in banks, which in turn has had an impact on their willingness to lend — so they have to look for alternative sources of financing.”