Kingdom of bonds

Last week’s sale of $ 17.5 billion worth of sovereign bonds by Saudi Arabia, a record for an emerging market, was no ordinary affair. The sale is part of a series of measures the country is taking to extricate itself from a sticky situation — a deeply entrenched structural dependence on oil in a world of persistently low oil prices, which went from over $110 a barrel in 2012 to below $30 at the start of 2016. This has, not surprisingly, had consequences for the kingdom, most of whose revenues come from oil. It posted a record $98-billion budget deficit, or 16 per cent of GDP, in 2015, and is expected to grow at rates less than half of last year’s, according to the International Monetary Fund. Riyadh is only too aware of its precarious position. It has moved away from a ‘pump at will’ policy at OPEC, one designed to keep U.S. shale oil in check but that ended up hurting its own economy by pushing down oil prices. Consequently, at next month’s OPEC meeting Saudi Arabia is likely to accept output cuts, even though these cuts may not apply to its arch-rival Iran. It has also decreased government spending, cut public wages and bonuses, and plans an IPO of Saudi Aramco, the state oil producer, as part of Deputy Crown Prince Mohammed bin Salman’s ‘Vision 2030’ reform plan. For now, the bond sale will help close its budget gap and take pressure off its approximately $550 billion foreign exchange reserves.

The success of the debt issue, oversubscribed with orders totalling $67 billion, is due to three main factors. First, despite the high price of the bonds and the long-term economic and geopolitical risks associated with Saudi Arabia, the yields looked attractive in the context of low interest rates in developed economies. Second, oil prices have increased since the beginning of the year and are in the region of $50 a barrel. Third, the kingdom’s salesmen are reported to have made a solid pitch on the bond roadshow, addressing investors’ concerns over the undiversified economy and reiterating Saudi Arabia’s commitment to peg the riyal to the dollar. Longer-term risks remain for the kingdom, notwithstanding the markets’ response to its bonds. A movement towards cleaner fuels and the country’s involvement in wars in Syria and Yemen pose serious risks to its stability. As the era of oil starts drawing to a close, Saudi Arabia, which has so far ignored the moral case for a gentler, more gender-equitable and open society, may now be forced to be drawn closer to the rest of the world.

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Printable version | Mar 30, 2020 1:40:37 PM | https://www.thehindu.com/opinion/editorial/Kingdom-of-bonds/article15726449.ece

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