Saudi Arabia raises US$9.5 billion in Islamic bonds
In 2016, Saudi Arabia raised US$17.5billion in its first dollar-denominated sovereign bond issue, and now it has issued a further US$9.5 billion in Islamic bonds.
The kingdom is also planning the IPO (stock exchange listing) of state oil company Saudi Aramco in 2018, as part of deputy crown prince Mohammed bin Salman’s Vision 2030 programme.
US$17.5 bil raised in last year’s inaugural overseas sovereign bond issue
In October 2016, Saudi Arabia issued sovereign bonds worth US$17.5 billion in the international capital markets in a bid to restructure its finances, damaged by a fall in the crude oil price.
This was the largest ever emerging economy bond issue, comprising US$5.5 billion each of 5-year and 10-year bonds, and US$6.5 billion of 30-year bonds.
The yield is 135bps more than US Treasuries of similar maturity for 5-year, 165bp for 10-year, and 210bp for 30-year bonds. Bloomberg reports that people with a knowledge of the offering said investors submitted US$67 billion in bids.
Further US$9.5 billion Islamic bond issue
The latest Islamic bonds, issued just half a year later, comprise a 5-year tranche at a spread of 100bp to the benchmark and an equal-sized 10-year tranche at a spread of 140bp.
These “sukuk” Islamic bonds, unlike regular Western bonds, are securities issued in compliance with sharia Islamic law, which prohibits the payment of interest. But, as with Western bonds, sukuk owners are entitled to a share of profit associated with the bonds.
As with the previous dollar-denominated bond issue, Bloomberg reports there was strong demand from investors, with bids totalling more than US$33 billion. US ratings agency Moody’s assigned a provisional rating of A1 (the second-highest rating) to the sukuk, while Fitch Ratings gave it A+ (seventh-highest).
Angelo Rossetto, a trader at GMSA Investments in London, described the issue as the “largest and most liquid sukuk,” and forecast further growth in demand after the Easter bank holiday weekend (April 14-17).
Saudi’s economic growth slowed to 1.4%
These two successive bond issues form part of the programme to repair Saudi Arabia’s ailing finances.
The price of crude seemed to recover after the 2008 Lehman collapse, but started to weaken again in 2014 on the back of economic slowdown. The price fell further in 2016 after the West lifted its sanctions against Iran, and the fall has been compounded by the growth of the US shale oil industry.
This tipped Saudi Arabia, which generates 75% of its revenue from the oil industry, into deep financial crisis. The deficit reached a record 367bn riyals in 2015. Although it shrank to a lower-than-forecast 297bn riyals in 2016, Saudi’s economic growth rate, which previously averaged 4%, slowed to 1.4%.
In order to survive as a nation, Saudi Arabia has been forced to take steps to wean itself off its dependence on oil through industrial reform, and this year announced the IPO of state oil company Saudi Aramco.
Will the Saudi Aramco IPO go ahead?
The Saudi government aims through the measures outlined above to reduce its deficit to 198billion riyals in 2017. However, it is continuing to break into its savings funds, with foreign currency reserves falling to US$514billion from US$593 billion a year ago.
Deputy crown prince Mohammed bin Salman, acknowledged as the de facto future king of Saudi Arabia, put forward the Vision 2030 economic reform plan, which includes the recent overseas bond issues, in a bid to diversify the kingdom’s economic base and throw off the dependence on oil revenue by 2030.
The kingdom is planning an IPO of state oil company Saudi Aramco in 2018. The company is forecast to be valued at US$2 trillion, making it the largest IPO ever, but many observers believe the Saudi government will offer less than 5% of the company’s shares, effectively retaining control of the company.