Saudi Arabia will working its way through the global debt markets to keep its spending priorities in place. Mohammad Al Jadaan, the Finance Minister, says it could borrow up to 220 billion riyals this year. Image Credit: Reuters

Riyadh: Saudi Arabia will rely on the biggest debt programme since its debut in international bond markets in 2016 to absorb the shock to the budget from collapsing energy prices and cuts in oil output. The kingdom could borrow 220 billion riyals ($58 billion) this year while keeping its drawdown from reserves at up to 120 billion riyals, as originally planned in the budget

The government is looking at additional spending cuts and may issue as much as an extra 100 billion riyals of debt on top of 120 billion riyals already announced, according to Finance Minister Mohammed Al-Jadaan.

"The kingdom went through similar crises in its history - maybe even worse - and was able to pass through them," he said. "This is not an exception."

Although many major economies have met the global downturn by deploying massive stimulus, Saudi Arabia has to tread more carefully as a historic crash in crude prices adds strain to its finances. The government said last month that it planned to raise its debt ceiling from 30 per cent to 50 per cent of gross domestic product as it borrows more to cope with the crises.

The kingdom has already tapped international bond markets twice this year and has borrowed a total of $19 billion from local and international investors, according to data compiled by Bloomberg.

Saudi Arabia's dollar bonds have sold off this year as the pandemic and the meltdown in oil markets prompted global investors to rush to haven assets such as US Treasuries. The kingdom's average yields have climbed almost 110 basis points since early March to 3.54 per cent.

Still, its dollar securities are down 4.3 per cent this year, which is much less than the average of 11.5 per cent among emerging-market sovereigns. And the country attracted more than $50 billion of orders for a $7 billion deal last week, showing there's plenty of demand for its debt.

Trying to rein in the deficit

Saudi Arabia was targeting a fiscal deficit of 6.4 per cent of GDP this year under the assumption that Brent crude would average about $65 per barrel, according to Bloomberg Economics. The government's budget deficit could widen to 15 per cent of economic output, according to Mohamed Abu Basha, head of macroeconomic analysis at investment bank EFG Hermes in Cairo.

The fiscal shortfall reached 4.5 per cent last year after peaking at just over 17 per cent in 2016, according to the International Monetary Fund.

Brent is trading around $22 a barrel - far short of the $76.1 the IMF estimates Saudi Arabia needs to balance its budget - leaving officials with limited options to offset economic pain without crippling public finances.

Without providing details, Al-Jadaan said the kingdom was "looking at additional measures" to reduce government spending. He added that officials expected to save some money during the virus-related shutdown as they spent less on on travel, events and entertainment, and would "delay some spending on projects that are halted now."