Doing it just for the second time in its history, Saudi Arabia has turned to the international debt markets.
The Kingdom sold its Islamic bonds, also known as sukuk, at $9 billion less than six months after the giant oil exporter tapped the debt markets for the first time by selling $17.5 billion in conventional bonds.
The country has scheduled to repay of the Islamic bonds in 5 years while the remaining will mature over a 10-year period.
The move to harvest money from global investors has been made at a time when oil prices are crashing making the Kingdom’s huge budget difficult to implement. This is a twist of matters as only some five years ago, no one would imagine Saudi Arabia would turn to the international community for money.
In a statement released in December, the country announced that this year it would face a $53 billion deficit in its budget. This is equivalent to 7.7% of its GDP. As a strategy of narrowing the gap, the country opted to issue debt and tap its foreign reserves.
However, the foreign reserves didn’t do much as they also seem to have taken a hit. A comparison between performance in February 2016 and the same time this year showed that it sank to $514 billion from $593.
Easy to get Investors
Saudi Arabia doesn’t seem to have any difficulty getting investors to purchase its debt.
The government has already received $33 billion bids for the new debt, reported the Saudi press agency.
The bonds are in complacent with the Shariah principles that refute payment of interest. This makes it possible for the issuers get to a wider pool of investors as opposed to the conventional bonds.
The government hopes that it will be able to raise enough money from sukuk to meet the kingdom’s financial needs at a time the oil prices get unfavorable.
“They’re kicking the oil barrel down the road; they’re buying time on the fiscal deficit,” said Patrick Drum, a portfolio manager at Saturna Capital, which runs a sukuk-bond fund.
John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh, said that Saudi Arabia isn’t yet done with surprises considering how good the sukuk is performing during an Easter holiday.
Besides the bonds, the government also is set to become the world’s largest IPO of state oil company Saudi Aramco. The initial public offering will also assist in shelving the budget shortfalls.