A New Frontier for Bonds
There appears to be strong investor demand for the first round of bonds to come out of Saudi Arabia. The Middle East powerhouse’s first debt offering on global markets is looking like a success, with nearly $15.0 billion to $20.0 billion worth of funds having already been committed.
As the first step in a larger economic reform plan, the debt offering is a landmark moment for the country. It is an outward turn that opens them to international financial markets, setting the stage for even more ambitious maneuvers.
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For instance, there’s a good chance that Saudi Arabian firms will issue corporate bonds in the future. (Source: “Monster $15 billion+ Saudi debt deal gets set to hit market,” CNBC, October 18, 2016.)
Officials have been making their way around the world, garnering interest in the bond issue. They stopped most recently in New York, where they met with several investors on Tuesday.
Rumors abound that the five-year Saudi note would come to the market roughly 160 basis points above the equivalent Treasury bill in the U.S. The 10-year Saudi bill is also supposed to come in 185 basis points higher than the 10-year U.S. note, while the 30-year spread would be 235 basis points.
In other words, even the spread would operate like a traditional yield curve.
The economic reform package has become a priority as the Saudi government continues to run ever-widening deficits in the shadow of falling oil prices. Despite the country’s extraordinary wealth, the 2015 deficit stretched to $100.0 million.
This enormous budget shortfall came regardless of cutbacks in the wages of ministers and other public workers. There was simply no counteracting the drop in crude oil prices.
And considering the Saudi government aims to balance the budget by 2020, it makes sense for them to move forward with an economic liberalization program. Their population skews young, and there aren’t enough private sector positions to provide them sufficient employment.
Opening up the kingdom to foreign capital and weaning off a dependence on subsidies is drawn straight from the economic development playbook. Deputy Crown Prince Mohammad bin Salman Al Saud is the one spearheading the initiative.
He wants to turn Saudi Arabia into an economically diverse but socially conservative force in the global economy
