Saudi government debt insurance costs jump as oil prices fall

April 23, 2025, 5:40 AM

Government debt insurance is rising in cost as investors reduce risk in turbulent markets

Credit default swaps insure debt
Investors seeking less risk
Saudi and Egyptian premiums peaked

The cost of insuring government debt in the Middle East and North Africa (Mena) has jumped this month, in some cases – including Saudi Arabia – to multi-year highs.

Investors are fretting over the impact of global trade tensions on economic growth and international oil prices, and the risk of Israeli-US military action against Iran.

The premiums on credit default swap (CDS) contracts for Egypt and Saudi Arabia hit 13-month and 54-month highs respectively in mid-April, although they have since come down.

They surged more than 50 percent from early March as US President Donald Trump roiled international markets by announcing on April 2 the highest tariffs on US imports in more than a century.

A CDS is a derivative contract that reflects the perceived credit risk of a borrower. These contracts are between two third-party entities – such as a bank and a hedge fund – with the reference country or company uninvolved; it is like buying insurance on a house one does not own.

The higher the CDS premium, the greater the likelihood of the borrower defaulting.

“There’s a very significant decline in investors’ risk appetite,” says Farouk Soussa, Mena economist at Goldman Sachs in London.

“People are seeking safe havens and can’t find them; US treasuries are no longer a safe haven, the dollar is no longer a safe haven, so it’s a massive risk-off move, and the Middle East isn’t immune to that.”

Egyptian and Saudi CDS premiums remain elevated. Premiums for Oman and Bahrain are also higher.

The imposition of a flat 10 percent US tariff rate on most Mena countries – Jordan is 20 percent – is likely to have little direct impact on those countries, says Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes in Cairo.

Higher CDS premiums are more a result of the sharp drop in oil prices, he says.

“Reduced oil revenues could put Gulf government budgets under stress, although the effect differs by country,” he says. “Some will have to either borrow more or reduce spending, which would impact economic growth.”

The Brent crude benchmark was trading at $67 per barrel on Tuesday, down 9 percent since April 2. Goldman Sachs forecasts general oil prices at $62 per barrel at the end of this year, and an average $58 in 2026.

“In that environment, most GCC countries will run significant deficits,” says Goldman Sachs’ Soussa. “The borrowing requirements of GCC countries will increase and the region is already the biggest debt issuer in emerging markets.”

CDS premiums are higher because investor risk-appetite and the capacity of the markets to absorb that level of borrowing is in question, Soussa says.

To swap the risk of default, a lender to a government buys the CDS from another investor, who agrees to reimburse them if the borrower defaults.

State finances in the UAE, Qatar and Kuwait will be less affected by lower oil revenue, says EFG Hermes’ Abu Basha, which is reflected in their relatively steadier CDS premiums.

“Saudi Arabia has been most impacted, which makes sense because it’s the country that’s more sensitive to lower oil prices due to its large spending plans and its relatively early stage of economic diversification,” says Abu Basha.

In addition, countries such as Egypt that are running “significant” current account deficits are more reliant on external borrowing and are therefore seen as more vulnerable in an environment where international financial conditions tighten, says Goldman Sachs’ Soussa.

“Egypt comes under that category, which has two opposing forces in action,” he says. “Lower oil prices are positive for external financing because it reduces energy import costs, but conversely higher borrowing costs make it more difficult for Egypt to finance its current account deficit.”

Egypt’s CDS is also higher on expectations that capital outflows will increase as investors become more risk-averse, says Abu Basha.

US negotiations with Iran on the Islamic republic’s nuclear energy programme and fears of failure here is another factor influencing Mena countries’ CDSs, he says.

“That’s very material for Middle East stability and the Gulf in particular,” says Abu Basha.