Aramco’s debt push threatens Saudi banks’ liquidity

Aramco

• $20bn raised on debt market
• Plans to take on more debt
• Concerns over squeezed liquidity

Saudi Aramco’s plans to keep tapping the local debt market could place further liquidity pressures on the country’s banking sector, as the government looks for new ways to raise cash for its economic development plans. 

The oil giant’s chief financial officer Ziad Al-Murshed told Bloomberg last week that plans were underway to take on more debt in order to concentrate on the “value and growth” of its multi-billion-dollar dividend pay-outs to shareholders.

These include Saudi Arabia’s sovereign wealth fund PIF, which holds a 16 percent stake in Aramco. 

Saudi Aramco’s dividend payouts are the biggest in the world. This year it says it expects to declare total dividends of $124.3 billion, of which $43.1 billion would be performance-linked dividends. Total dividends in 2023 were $97.8 billion, up 30 percent on 2022.

Despite a strong balance sheet – Aramco reported Q3 net income of $27.6 billion – the company has raised $20 billion from the debt market in the past year in syndicated loans, bonds and sukuk (sharia-compliant bonds).

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At the same time there are concerns over tightening liquidity in the kingdom, with huge projects being funded as part of the kingdom’s ambitious Vision 2030 programme.

Liquidity, as measured by banks’ combined loan-to-deposit ratios, remains squeezed, increasing to 97.8 percent as of June 30, up from 97 percent three months earlier, according to a report earlier this year by the consultancy Alvarez & Marsal. 

“The Saudi banking sector has experienced liquidity pressures due to rapid credit growth and funding large-scale projects, leading to increased competition for deposits and higher funding costs,” says economist Ali Metwally.

The giga-projects – valued at around $1.25 trillion – are already under funding pressure because of lower than expected global oil prices and lacklustre foreign direct investment. The government expects three years of budget deficits, crimping its ability to funnel cash to PIF, which is funding the projects. 

Saudi Arabia’s economy is expected to record a modest expansion of around 1.5 percent this year, a turnaround from last year’s contraction of 0.8 percent as a result of output cuts that are expected to end in December. 

Despite the prospect of higher-for-longer interest rates, Justin Alexander, a director at US consultancy Khalij Economics, says there is not a big risk to Aramco, which currently has a low debt/equity gearing of around 2 percent.

“It has a lot of scope to borrow before coming close to peer oil companies,” he says.

The debt to equity ratio is computed by dividing the total liabilities by the shareholders' equity. As of 2023, the industry average debt-to-equity ratio stands at around 0.5. 

Outsourcing

Alexander says that if dividends were to remain at current levels into the first quarter of next year, while at the same time oil revenues stay around the same, “it would be hard to argue that the sovereign isn't effectively outsourcing some of its borrowing” to Aramco, “to mitigate the budget deficit via higher dividends and reduce the amount the sovereign itself needs to finance.”

Saudi Arabia’s government gross debt as a percentage of GDP is expected to increase to 28 percent this year and rise further to hit 33 percent by 2027, according to the International Monetary Fund’s World Economic Outlook.

Yet credit ratings agencies remain upbeat. On Sunday, the credit rating company Moody’s Investors Service upgraded the kingdom’s credit rating to Aa3 from A1.

Similarly, S&P, in its most recent report, revised its outlook on the kingdom to “positive” from “stable” and affirmed its A/A-1 long- and short-term foreign and local currency unsolicited sovereign credit ratings.