Saudi Arabia’s return to the international debt market is excluded until...

Al-Eqtisadiah learned from well-informed government sources that Saudi Arabia does not intend to track the international income instruments market or dollar loans for the remainder of this year, after the local market succeeded in securing the Kingdom’s needs at a low cost.
Saudi Arabia, according to official statements early this year, was planning to issue dollar bonds to pay off the budget deficit, but the sources (who are widely familiar with the file of external borrowing) confirmed to the newspaper that the Kingdom does not intend to return to foreign borrowing, in all of its debt instruments and loans, during the fourth quarter of 2020.
Saudi Arabia succeeded in covering nearly the entire budget deficit of the third quarter by borrowing from its local markets that are full of surplus liquidity, after the success of the strategy of the National Debt Management Center, on behalf of the Ministry of Finance, in expanding the base of local investors than it was in the past.
These data are consistent with the analysis of the unit of reports in Al-Eqtisadiah newspaper, which indicates that the Kingdom has secured its financial needs from the local market, which reduces the possibility of resorting to international markets to cover any deficit.
The analysis was based on the actual budget statement for the first nine months 2020 issued by the Ministry of Finance, including the actual budget for the third quarter, as the statement showed the existence of a residual amount of debt issues worth 45 billion riyals (this includes the discount and bonuses on issuances) that has not been used and will be used to finance the remainder Of the financing needs for this year, knowing that Saudi Arabia is expected to make two monthly issuances for the remainder of the year.
The reversal of previous expectations of issuing dollar bonds for this year comes to reflect the flexible policy of Saudi Arabia, which sets its sights on the importance of obtaining borrowing associated with the low cost, and this is what the local market has provided for this year.
This decision would have a positive impact on trading dollar debt instruments, especially as investors were expecting Saudi Arabia to issue another international issuance.
The research arm of “Morgan Stanley” also expected that Saudi Arabia would not resort to foreign borrowing, after the American bank economists reviewed the preliminary statement of the 2021 general budget issued by the Ministry of Finance.
In his research paper, Morgan Stanley indicated that foreign markets were expecting Saudi Arabia to borrow an additional $ 6 billion for the remainder of 2020.
And for the next year, the investment bank added that the total expected supply of international debt instruments is likely to reach 14.7 billion dollars, after taking into account one of the Eurobonds that are expected to mature in 2021, thus becoming the expected net debt instruments for Saudi Arabia ( Or new non-proceeds issues that will go for refinancing) at $ 9.2 billion.

Low cost
The reversal of previous expectations of issuing dollar bonds for this year comes to reflect the flexible policy of Saudi Arabia, which puts in mind the importance of obtaining borrowing associated with the low cost, and this is what the local market has provided for this year.
This is in line with the analysis published by Al-Eqtisadiah on November 1, which indicated that the cost of local borrowing for the Saudi government had achieved record drops in the state treasury, as the size of the decline in the annual distribution return to investors reached between 6.9 and 55.4. Percentage compared to the highest recorded return for each maturity period (i.e. for each period).
The newspaper pointed out at the time that “the domestic market for fixed income markets, which did not exist before 2006, has become a financial tributary that the government can rely on at a time when financing costs have increased for all countries that borrowed from international markets after the outbreak of the pandemic during the first quarter.” “.

Debt during the third quarter
Saudi public debt recorded a growth during the third quarter of 3.4 percent, compared to the previous quarter, registering a slowdown after the previous quarter recorded a growth of about 13.3 percent, in conjunction with the revenues affected at the time by the Corona pandemic, in addition to the decline in oil prices.
The volume of public debt at the end of the third quarter 2020 amounted to about 847.8 billion riyals, compared to the end of the second quarter of this year, which amounted to about 819.9 billion riyals. The debt rose after the budget recorded a deficit of 40.77 billion riyals in the third quarter, with expenditures increasing 7 percent.
According to the monitoring unit of the reports in Al-Eqtisadiah newspaper, based on data from the Ministry of Finance, the internal debt amounted to about 497.59 billion riyals, accounting for 58.7 percent, while the external debt amounted to about 350.16 billion riyals, constituting about 41.3 percent of the total public debt.
According to the estimates of the Ministry of Finance, the public debt for the current year is expected to reach 854 billion riyals, as Saudi Arabia allowed its public debt to grow during the current year 2020 over what was planned due to the Corona crisis, for the sake of financial sustainability, which preserves the gains and ensures the continuity and sustainability of growth and economic progress And provide the basic requirements for citizens.
Earlier, the Ministry of Finance expected a rise in public debt in 2020 to 854 billion riyals, equivalent to 34.4 percent of GDP, compared to its prediction before the pandemic of 754 billion riyals, which would then constitute 26 percent.
“Saudi Arabia has the solvency to deal with this crisis and to keep the deficit under control,” said Mohammed Al-Jadaan, Minister of Finance, earlier.
The fiscal policy in Saudi Arabia aims to achieve a balance between the objectives of maintaining financial stability, promoting sustainable economic growth, and supporting the stage of economic and social transformation that Saudi Arabia is going through, in accordance with the Saudi Vision 2030.
According to the monitoring, the size of debt to GDP increased to reach the level of 32.11 percent, compared to the percentage recorded for the same period last year at 23.78 percent, based on 2019’s GDP.
Saudi Arabia earlier amended the ceiling for public debt from 30 percent of GDP to 50 percent. Despite this, the Ministry of Finance expects that the new ceiling will not be reached in the medium term, as the ceiling has been raised with the increase in the need for financing to face the repercussions of the “pandemic.” “.

Pros of the Saudi methodology
Bankers unanimously agree that the lack of supply of foreign sovereign issuances will positively affect the pricing of future issuances as well as the credit margins of listed debt instruments, as the prospective debt issues for Saudi Arabia, i.e. supply, will be less than what the market previously expected, i.e. demand.
This will enhance the performance of fixed income instruments, whether listed or issued in the future. This is due to the fact that investors who manage funds with asset management companies and follow JP Morgan emerging market bond indices, will have to close their exposure to debt instruments. Saudi Arabia according to the predetermined weight of Saudi Arabia with the index, after those future issues of Saudi Arabia are included in those indicators.
This means that those investors will have to buy part of the old listed issues, in order to compensate for the low allocation percentage with the new issues, due to the lower total value of those issues than what fixed income investors have experienced in the past two years.

International Sukuk Market
Although Saudi Arabia does not intend to issue dollar sukuk this year, it is expected that the volume of sukuk issuances for 2020 will be similar to the levels recorded in 2019 despite the unprecedented pressure added by the Covid-19 pandemic.
And after the markets start to recover further, the supply of sukuk is expected to increase as the need for financing increases, according to a report updated by Fitch Ratings.
The volume of green sukuk and sustainability sukuk reached $ 7.2 billion at the end of the third quarter, according to Fitch. Despite the modest growth, the green sukuk market is still in its infancy and is unlikely to become a significant part of the sukuk market in the near term.
It is noteworthy that efforts to standardize sukuk are continuing, as the International Islamic Financial Market launched a new document on Ijarah Sukuk, and before that, the Central Bank of Kuwait established the Supreme Committee to oversee compliance with Sharia provisions.

Economic Reports Unit