Saudi Arabia borrows from the retirement and insurance funds to finance...

  Fears of rising sovereign debt (Al-Araby Al-Jadeed)

Saudi Arabia is increasingly relying on state investment institutions to finance the kingdom amid the Coronavirus pandemic, a strategy that raises questions about the possibility of the Saudi citizen being affected by a shock that may occur at the level of sovereign debt.

The two state-backed institutions – the Public Pension Agency and the General Organization for Social Insurance – nearly doubled their holdings of domestic debt in the first six months of this year, as Riyadh seeks to finance a growing budget deficit through the sale of bonds.

However, their exposure to Saudi companies remains confidential, because the government does not provide comprehensive and up-to-date details on their investment portfolios or returns.

Hasnain Malik, head of equity strategies at Tellimer, said: “In normal times, government funding from associated entities may cause concern in terms of the transparency of the final debt figure and with regard to the self-management of these entities.

“However, this concern over the total liabilities of all government entities has existed for some time in other parts of the Gulf Cooperation Council. Also, financing a very large fiscal deficit probably requires some unconventional methods.”

Investors and analysts say that using domestic borrowing to finance the deficit and investing state funds in it is very common in countries with emerging and developed economies, and that it has some benefits such as reducing currency risk.

This move has another advantage in Saudi Arabia, which is the lack of withdrawal of liquidity at banks, which happened after the collapse of oil prices in 2015 when government debt issuances imposed pressure on Saudi banks.

At the same time, it could make Saudi citizens who depend on the pension and social security institution “overexposed to the Saudi sovereign risk that would become problematic if the performance of Saudi government paper is less than” said Chrysianis Christens, a manager in Fitch’s sovereign debt team. Other local or international investments. ”

In response to a question about whether the authorities encourage state institutions to increase their exposure to government debt, the Saudi government told Reuters that the demand for domestic sovereign debt increased this year across various investor categories due to market fluctuations in other categories of investment assets.

She said that the debt is being updated on a quarterly basis to enhance transparency in the market, and that the demand for domestic debt helped her in managing supply levels in foreign markets, thus protecting the differences in return on securities. The Saudi government did not respond to inquiries about the investment portfolios of the Retirement Corporation and the Social Insurance Institution.

The Corona virus pandemic has prompted central banks around the world to add local assets to their investment portfolios, and to further state intervention in the economy.

Saudi Arabia, the world’s largest exporter of crude oil, has been particularly hard hit by the economic repercussions of the Covid-19 pandemic. The decline in oil revenues has led to an increase in the government deficit, which has more than doubled Saudi financing needs this year, reaching $ 85 billion, according to Moody’s.

In the early stages of the crisis, Riyadh raised its public debt ceiling to 50 percent of GDP from 30 percent to increase fiscal flexibility. It transferred $ 40 billion from external reserves to the central bank to finance investments in its sovereign wealth fund, the Public Investment Fund.

Some of the new financing was covered by institutions such as the Public Pension Agency and the General Organization for Social Insurance.

The two institutions did not respond to Reuters requests for comment on their investments.

The two institutions do not provide details of their financial position. This is not strange in the Gulf, but disclosure in Saudi Arabia is late when compared to similar institutions in developed and emerging markets.

The acquisition of public debt by government institutions increased to 166.9 billion riyals ($ 44.50 billion) at the end of last June from 92 billion riyals at the end of last year, while the exposure of Saudi commercial banks to local government debt increased by just over 20 billion riyals in the same period. .

Riyadh has increasingly used debt to fill state coffers since the oil price crash of 2014 and 2015, but debt levels, which are expected to hover around 32 and 33 percent of GDP in the next three years, are nonetheless relatively low.

The Finance Ministry said it expects the government deficit to rise to 12 percent of GDP this year from 4.5 percent last year.

Garbis Iradian, chief economist for the Middle East and North Africa at the Institute of International Finance, says that about $ 25 billion of the fiscal deficit this year, which he estimated at about $ 72 billion, or 10.2 percent of GDP, will be funded by local banks and institutions, such as the Public Pension Agency. And the Public Institution for Social Security.

He added that the rest will be covered by official reserves, to the extent of $ 32 billion, and external financing, to the range of $ 15 billion.

“The domestic debt market development strategy to reduce dependence on external instruments is a sound strategy. It’s encouraging and it gets it right,” said Tim Ash, Senior Emerging Market Sovereign Debt Strategic Planner at BlueBay Asset Management.

But he added that his fund was not sustainable in the domestic market due to broader concerns about the stability of the regional peg.

The Saudi currency is pegged at 3.75 riyals to the dollar on the spot market. However, it experienced some volatility in the forward market this year as oil prices fell.

Rachel Zimba, a researcher at the Center for a New American Security, a think tank in Washington, believes that the active intervention of domestic capital in deficit financing is a “source of resilience,” and that similar steps in other emerging markets have helped offset the impact of fluctuations in financial flows.

“My major concern is less with regard to the use of state stocks, which are allocated for times of need, and increases if transparency in government spending and the connections between state-related entities worsen,” she said.


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