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Larger deficits unlikely to trouble Saudi debt access

A worker restoring the Diriyah district, one of the giga-projects Saudi Arabia is using a budget deficit to create Reuters
A worker restoring the Diriyah district, one of the giga-projects Saudi Arabia is using a budget deficit to create
  • Deficits up to $30bn expected
  • Used to fund giga-projects
  • Liquid assets 80% of GDP

Saudi Arabia faces several years of budget deficits as it pushes ahead with massive development projects.

Construction is fuelling the regional economy despite a slide in oil prices, raising questions about the kingdom’s continued access to debt markets. 

Saudi Arabia launched its Vision 2030 plan in 2016 to diversify the economy away from oil, but it still relies on oil exports to sustain its giga-projects and special economic zones, including the futuristic city Neom, the Diriyah district of Riyadh and Jeddah Central. 

“For now at least, borrowing costs for the kingdom are not too bad as dollar bond spreads are around 100-150 basis points over US treasuries and it has been able to acquire these syndicated loans too,” said James Swanston of Capital Economics. 

The Saudi finance ministry is predicting annual deficits of between $20 billion and $30 billion over the next three years, after oil prices began to slide further from a break-even price of $86 per barrel given by the IMF in October. 

In the latest of a spree of loan arrangements, Saudi Arabia sold $12 billion of bonds last week in a three-part issuance that was heavily oversubscribed. And in December the finance ministry concluded an $11 billion syndicated loan that was 2023’s largest worldwide. 

A senior executive at Rothschild & Co told a conference in Abu Dhabi this month that Saudi banks are being pushed to finance the kingdom’s colossal projects, triggering a liquidity squeeze in the mid-market sector and creating demand for private credit. 

He said that although most projects are backed by either the finance ministry or Public Investment Fund (PIF), their structuring has not been “too palatable” for international lenders. But so far there has been no talk of loan restructuring. 

One of the largest wealth funds in the world, PIF had a total of $85 billion in loans and borrowings at the end of 2022, an almost 30 percent increase from the end of 2021. 

Saudi government debt has risen steadily since 2014, reaching an all-time high of $264 billion by the end of 2022, which was valued at 23 percent of GDP in March 2023. Foreign exchange reserves have declined steadily since 2015 to $414.8 billion in September. 

S&P Global Ratings says Saudi Arabia’s debt levels are still not alarming by international standards given these buffers, and it will still be able to raise debt to make up for an overstretched domestic banking sector. 

“The government also has liquid assets that we estimate at over 80 percent of GDP in 2023, which cushions against swings in oil prices,” said Zahabia Saleem Gupta, director of sovereign and international public finance ratings at S&P Global Ratings. “This affords them headroom to raise additional debt to finance projects.” 

Government efforts to encourage credit growth will be helped by falling inflation, expected to decline to 2.2 percent in 2024, though the government is aiming for a figure of 1.7 percent.

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