Saudi Arabia’s economy is going from strength to strength. In just six months, the Kingdom has managed to raise nearly SR100 billion ($26.5 billion) in international bonds.
Last week, it raised its first dollar-denominated sukuk for $9 billion. It was more than three times oversubscribed at a time when markets in Europe were gearing up for their holidays. And in October last year, Saudi Arabia managed to raise $17.5 billion in what became the largest bond issued by an emerging-market country.
Business confidence is turning a corner. In February, the non-oil purchasing managers’ index (PMI) was the highest in 18 months, especially as new orders showed a pickup. Liquidity conditions have improved over the last several months. This is due to the issuance of international bonds as well as a partial recovery in oil prices.
Over the last week or so, oil prices have started to pick up. There is speculation about a possible extension to the Organization of the Petroleum Exporting Countries’ (OPEC) output cuts during the second half of 2017. The next five weeks will be critical for OPEC as it meets on May 25 to discuss the 1.2-million-barrel output cut. Given where oil prices are today, around $55 per barrel, it will be hard not to agree to extend the cuts. It looks like Saudi Arabia is fully complying with the deal of capping its output at 10.058 million barrels per day (bpd).
The rate used by Saudi banks to price loans (known as Saibor) was down to its lowest level in nearly 14 months. Rates are expected to fall further over the next month, which should be positive for borrowers. A key measure of liquidity, loan-to-deposit ratio, improved to 88.1 percent in February from 90.8 percent in August 2016. Moreover, pressure on the currency in the forward market has been reduced and it is now down to 2015 levels.
Tapping international markets in order to raise additional revenues is an important step toward the diversification of funding sources.
Saudi Arabia is now becoming a major bond issuer. Tapping international markets in order to raise additional revenues is an important step toward diversification of the sources of funding. Frequency will not only help pricing but also consistency and predictability in the markets. This will help ease banking liquidity but also alleviate the pressure on foreign reserves, over time.
The fiscal adjustment program that Saudi Arabia is undergoing will help the economy better insulate itself from relying on one source of income.
Almost certainly, this year’s budget deficit will moderate this year. Last year’s deficit was an anomaly as it included accumulated private-sector arrears dating from 2015.
Pricing is important too. Since the issuance of the October Eurobond, pricing has tightened by more than 20 basis points. The sukuk was priced higher than the conventional bond but it will tighten as demand from Islamic finance funds picks up in coming weeks. The next bond issuance is not too far off and is expected to be a conventional one.
• John Sfakianakis is the director of economic research at the Gulf Research Center (GRC) in Riyadh.