Yasser Ibrahim has left NBE (UK) to become a Managing Director at ODDO BHF. He has been replaced by Yasser Hassan.
Saudi Bond Road Show Shines Light on Saudi Economy
Saudi Bond Prospectus Indicates Big Borrowing Plans in Years Ahead
Saudi officials began their presentations to investors in London on 12 October and the morning of the 13th, and then continued in Los Angeles on Friday 14th. Road shows continued in Boston on the 17th and New York on the 18th.
The Saudi team was led by H.E. Mohammed Al Sheikh, Minister of State; Salem al-Muhanna, Deputy Minister of Finance; Ayman al-Sayyari, Deputy Governor (Investments), Saudi Arabian Monetary Agency; Fahad al-Seif, Head of the Saudi Debt Management Office; and Walid al-Saif, Head of Corporate Finance and Project Development at Aramco.
Arrangers for the Global Medium Term Note Programme are Citigroup, HSBC and J.P. Morgan.
The base prospectus for the issue, dated 10 October 2016, is attached below.
The prospectus provides the usual mix of general information, updates on recent policy initiatives, and authoritative statistics. It is an essential reference tool for those seeking to understand what has been happening in the Kingdom.
In respect of financial developments, the following points stand out:
On 31 August 2016, the Kingdom’s direct indebtedness was $73bn, comprising the $10bn external bank loans raised earlier this year and $63bn in money raised from local banks and autonomous government institutions.
The National Transition Plan 2020 envisages the Kingdom’s ratio of public debt to GDP rising to as much as 30% by 2020. The Prospectus shows that this percentage was 5.9% at the end of 2015. If nominal GDP were stay the same, that would imply total indebtedness of up to $193bn at the end of 2019, an increase of $120bn, or an average of $30bn in each of the four years 2016-2019.
Of course, nominal GDP will not stay the same, but it is hard to predict how it will change, given the uncertainty surrounding oil prices. Nominal GDP increased by 1.4% in 2013, 1.3% in 2014 but declined by 14.3% in 2015, the Prospectus says.
So where will this annual $30bn come from, if that is indeed what the Kingdom will have to raise? (Since it is unlikely that $30bn will be raised this year, the average in the remaining years would be higher, if the government were to reach that 30% ratio.) The government raised $11bn from local banks in 2015 and raised $23bn from them in the first eight months of 2016. But in September 2016, when Saudi Arabian Monetary Agency (SAMA) announced that it would inject $5.3bn into the banks in order to ease liquidity (this was done in the form of deposits from government institutions), the relief in the banking system was tangible, implying that the banks do not have much room on their balance sheet for further domestic debt issues.
The Saudi government also raised $15bn in 2015 from Autonomous Government Institutions and $1.7bn in 2016.
Saudi banks had assets of $602bn at the end of June 2016. Private sector credit was $383bn, claims on the public sector $383bn and foreign assets $68bn. Net foreign assets (assets minus liabilities) were $42bn. The loans/deposits ratio was 90%. Putting all that together, we can see that Saudi banks still have some flexibility in their balance sheets – they could run down their foreign assets – but they certainly will not be able to take the lion’s share of $120bn of incremental government borrowing unless they put a break on private sector credit.
In practice, demand for private sector credit is likely to increase as a result of recently announced mortgage finance initiatives, broad economic objectives announced in Vision 2030, and working capital needs of companies feeling the squeeze of low oil prices.
The Prospectus also details actual government revenue and expenditure figures for 2011-2015 and the budget for 2016. This is not new information, but the extent of budgetary tightening is worth examination. Actual revenues were running around $275 - 330bn in 2011-2014. They fell to $164bn in 2014 and are budgeted at $137bn in 2015.
In contrast, expenditure is being maintained at levels that are broadly consistent with recent years. Actual expenditure rose from $220bn in 2011 to $296bn in 2015. It is budgeted at $224bn in 2016, although this figure includes $49bn in 'Budget Support Provision', the purpose of which appears to be to inject funds into strategically important areas and soften the blow of budgetary cuts. Absenting any additional funding from the ‘Budget Support Provision’, the budget for Public Administration (which includes subsidies and some general items) has been cut by two thirds since 2014, the budget for infrastructure and transportation has been cut by half, and the health and social development budget cut by a quarter compared to 2014. Defence and security and education and training have been cut, but not by as much.
The budget deficit for 2016 is estimated at $87bn. The Government's reserve assets totalled $562bn at the end of August 2016, the Prospectus says. The vast majority of this is in foreign currency and deposits abroad ($177bn) and foreign securities ($373bn).
Clearly, the Saudi government's financial reserves, combined with some debt issuance, will be sufficient to cover budget deficits in the region of $90bn for several years. But they will not be sufficient indefinitely. That is why Saudi officials need to have a good 'story' to tell investors who are interested in buying long-dated bonds.
The issue is not so much about debt servicing ability – even after more bond issues, the Kingdom's debt will be small in relation to GDP and debt servicing requirements paltry. It is more about the willingness of global investors to continue buying significant quantities of Saudi debt.
The Kingdom has a AA- minus rating from Fitch (on negative outlook), an A+ from Moody's and an A- from S&P. Those are good ratings, but they are not outstanding.
For both investors and the rating agencies, the Kingdom's story needs to revolve around the restructuring of government expenditure and the creation of new economic activities that will generate revenues over the long term. Those are the issues that the National Transition Plan 2020 is seeking to address, but the investor community will need answers well before 2020.
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