Creditors Starting to Collect
Many contractors who work with the Saudi Arabian government have been waiting on their checks for more than a year, but that wait is at an end. The Saudi government started paying those debts almost immediately after raising $17.5 billion through an international bond issue.
It was the first time the Middle Eastern powerhouse sought capital from global capital markets, but analysts are already considering it a success. The issue was oversubscribed after Saudi officials trekked around the globe, raising enthusiasm among international investors. (Source: “Saudi Arabia Is Already Spending The New Bond Money,” Zero Hedge, October 19, 2016.)
They stopped most recently in New York, where investors listened to a presentation about the country’s plan to diversify away from its dependence on crude oil exports. The debt issuance is only the first step in a larger economic reform package.
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According to previous reports about the debt issuance, Saudi Arabia is trying to cover its growing deficit. Last year, the country’s budget fell short by $100.0 million, or 15% of gross domestic product (GDP), meaning that falling oil prices had seriously taken their toll.
Saudi Arabia was learning about diversification the hard way.
As a result, the country is aiming to balance its budget by 2020. The austerity program that has stifled output in recent years is starting to ease, which should help boost non-oil output enough to lift revenues.
Finance Minister Ibrahim Abdulaziz Al-Assaf gave an interview with the state-owned media network to say that payments “have been regularized and will rise in the coming period.” That is good news for state contractors that have been waiting on payments, but it also allays other concerns.
For instance, many analysts and FX traders were worried about a devaluation in the riyal as a stimulant for the Saudi economy. That has become less likely, considering that raising this much debt overseas has shifted the foreign currency reserves of the Saudi government.
“This should dampen any lingering concerns that the riyal will be devalued. The government’s debt-to-gross domestic product ratio will rise as a result of the bond sale but, given its low starting point, it is hardly on a worrying path,” Capital Economics said.
