Dubai: Saudi Arabia is expected to witness a big spike in government borrowings in 2019, thanks to its expansionary budget and significantly higher fiscal break-even oil prices according to economists.
The kingdom’s 2019 budget projects a deficit of around 4 per cent of GDP. Total spending is budgeted to increase by 7.3 per cent from the estimated figure of last year.
Unlike 2018, most of the increase in spending will be allocated to public investment. The budget expects a rise in oil revenues of 7.4 per cent, which implies that Brent oil prices should average $77 (Dh282.82) per barrel in 2019 (as compared with $72 in 2018).
Economists believe that the oil price assumptions are too optimistic under the current market conditions and Saudi Arabia will need to resort to both domestic and international borrowings.
“Under our assumptions of Brent oil prices averaging $65 in 2019 and [Saudi] Aramco’s transfers to the budget remaining around 70 per cent of oil export earnings, then the deficit would slightly exceed 8 per cent of GDP,” said Garbis Iradian, Institute of International Finance (IIF) chief economist for the Mena region.
“We expect the [Saudi] authorities to continue tapping domestic and foreign debt sources to finance the fiscal deficits.”
Less sensitive to pricing
Many analysts say the budget deficit could be much higher than projected, with some analysts forecasting that it could be in the range of 7 to 9 per cent. Given its huge budgeted financing needs, analysts say Saudi Arabia is likely be less sensitive to pricing.
“Given the optimistic revenue projections, the [Saudi] government will need either to raise its deficit projections or lower spending and revise down its GDP growth forecast,” said Ziad Daoud, chief Middle East economist at Bloomberg Economics. “We expect the government to opt for higher spending at the expense of missing its deficit target.”
Saudi authorities recognise the need for issuing more bonds. Authorities said in mid-December that the government planned to issue around 120 billion Saudi riyals ($32 billion; Dh117.2 billion) of bonds in 2019 to help finance its deficit.
Last week, Saudi Arabia raised $7.5 billion in bonds due to mature in 2029 and 2050. The finance ministry said on Thursday that the order book for the $7.5 billion sale of longer-term debt peaked at $27.5 billion, with final pricing only a few basis points above corresponding secondary market yields.
Almost all the paper was bought by foreign investors, with US-based buyers in particular snapping up 40 per cent of the bonds due in 2029 and 45 per cent of the notes due in 2050.
Analysts said the display of strong market confidence in Saudi bond issuances last week and the likelihood of the US Federal Reserve pausing its rate hikes has increased the possibility of more issuance by Saudi government and government-related entities in the near future.
Reports suggest that Aramco is preparing for a $10 billion bond issuance scheduled for the second quarter of this year to fund its planned acquisition of petrochemicals giant, Saudi Basic Industries Corp (Sabic). Aramco is in talks to buy a 70 per cent share in Sabic from the Public Investment Fund, which could cost about $70 billion.
Debt to remain a preferred option
Larger financing needs imply an increase in the annual incurrence of debt, a weakening asset position, or both for Saudi Arabia.
Historically the kingdom has resorted to two main mechanisms through which it met its financing requirements, namely asset drawdowns or debt; or a combination of both.
Cost will be a major factor in deciding on which course to take. In many cases, it may be cheaper to issue debt than to forego investment earnings on assets.
In last March, the kingdom refinanced a $10 billion (Dh36.73 billion) loan made in April 2016 by changing it to a new five-year facility of $16 billion, at cheaper rates. In April 2018, the authorities also sold $11 billion worth of sovereign bonds in the international market.
Borrowing from the domestic banking system amounted to $14.5 billion in 2018, equivalent to 2 per cent of GDP. However, the overall, government domestic and external debt remained low, at around 20 per cent of GDP, in 2018.
Economists believe Saudi Arabia has adequate fiscal space to continue with another year characterised by a more loose fiscal stance to boost non-oil growth activity and stem a further increase in unemployment. A low government debt (20 per cent of GDP) and large financial buffers, combined with mobilisation of additional non-oil revenues, should keep the fiscal position on a sustainable footing
“The authorities are committed to keeping the public debt-to-GDP ratio below 30 per cent over the medium term, but this could be challenging particularly if oil prices decline below $60 [per barrel],” said Iradian.
