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Countries in the oil-rich Gulf have rushed to sell international debt, as their borrowing costs in relation to US Treasury yields fall to some of the lowest levels on record.
Saudi Arabia and its state companies, as well as Abu Dhabi, Bahrain and Kuwait, issued more than $27bn in dollar-denominated bonds and sukuk, an Islamic sharia-compliant form of debt, during September, in what bankers and investors said was the busiest month in years.
The petrostates have rushed to lock in historically low premiums over US borrowing costs and to tap investor demand for relatively high underlying yields, as traders increase their bets that the Federal Reserve will continue to lower US interest rates beyond its quarter-point cut last month.
“Everyone moved as soon as the bond market recalibrated to price in more rate cuts from the Fed,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“For investors, the [six-member Gulf Cooperation Council] still benefits from moderate to low levels of debt, supported by favourable credit ratings and vast sovereign assets,” said Carla Slim, Middle East and north Africa economist for Standard Chartered. Money raised by Gulf sovereigns was being used to drive development of their non-oil economies, she added.
The wealthy states are mostly raising funds to help push their economic diversification plans as subdued oil prices bite. Some, such as Abu Dhabi, are comfortable with current oil prices but want to increase their financing sources while borrowing costs are low.
Kuwait returned to the market this week after an eight-year hiatus caused by political wrangling over the legal authority to raise debt.
Emir Sheikh Mishal al-Sabah suspended Kuwait’s relatively boisterous parliament in May last year, paving the way for the law to be passed and the tiny oil-rich nation’s debt ceiling to be lifted.
Kuwait sold $11.25bn in three, five and 10-year bonds at spreads of 0.4 to 0.5 percentage points over comparable US Treasuries.
Abu Dhabi sold $2bn in 10-year debt at just 0.18 percentage points over Treasuries last week, the lowest spread on record for emerging market bonds at this maturity and the fourth lowest for any sovereign issuer.
Even Bahrain, the Gulf’s lowest-rated creditor, which has the region’s highest debt-to-GDP ratio of about 130 per cent, tapped international markets this week, issuing eight and 12-year bonds at a spread of 2.5 percentage points.
The biggest issuer has been Saudi Arabia, which sold a $5.5bn sukuk in September alongside $5bn in debt sales by its state oil company and sovereign wealth fund.
The kingdom has sold about $20bn in dollar and euro-denominated debt this year, rivalling Mexico’s sale of bonds to finance a bailout for its state oil company as the biggest issuance across emerging markets.
Saudi Arabia is grappling with widening budget and current account deficits as it continues to pump funding into ambitious development plans while managing lower oil prices, which is reflected in the size of its bond sales. However, its Public Investment Fund last month backed a $55bn buyout of Electronic Arts, the US gaming company, in a sign of the kingdom’s financial muscle.
Saudi Arabia has been reviewing spending on some of its so-called gigaprojects, including futuristic linear city The Line.
But a pre-budget statement from the finance ministry this week revealed that Riyadh was planning to increase its debt pile to fund higher levels of government spending than previously outlined. Although it had budgeted for a fiscal deficit equal to 2.3 per cent of GDP in 2025, the ministry estimated that this would balloon to 5.3 per cent — more than double last year’s level.
“Demand for Saudi debt remains strong, with debt still at a very low level in global terms”, said Malik at Abu Dhabi Commercial Bank. However, she added, “the ability for Saudi Arabia to continue with this expansionary position will become more expensive going forward if debt continues to rise at the current sharp pace”.
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