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Saudi Arabia will for the first time borrow in a foreign market because of cheap oil
Material posted: Publication date: 04-02-2016
Saudi Arabia for a budget deficit covering in $87 billion is going to borrow for the first time in the international market. At the first stage the volume of debt placement of Riyadh can make $5 billion, analysts consider.

Saudi Arabia, the largest petrogetter in OPEC, experiences considerable difficulties with balancing of the budget because of falling of prices of oil from which sale the treasury of the kingdom gains 73% of income. In these conditions Riyadh before financing the expenses by limited loan and use of the saved-up financial reserves not only went for sharp cut in public expenditure, but also was going to borrow for the first time in the history in the international debt market.

The international banks already joined in fight for the right to become underwriters of the transaction, writes The Financial Times (FT). On its results there can be a new benchmark in the debt market of the Middle East, experts consider.

Last year the authorities of the kingdom for the first time since 2007 issued the bonds nominated in rials in domestic market — local banks got bonds for the total amount of 15 billion rials ($4 billion). Loans in domestic market manage cheap, but for expansion of a pool of creditors the government also planirut to place dollar bonds. At the first stage the country can issue dollar bonds of $5 billion, reported FT of analytics of two unnamed banks.

They don't exclude that issue will be divided into some trenches, first of which will hardly represent long-term papers. In spite of the fact that this sum won't be able to help noticeably Riyadh with reduction of budget deficit, it is favorable to authorities to begin with small release as investors already considerably worry concerning ability of the kingdom to serve the debt obligations. According to the unnamed European banker, the Saudi bonds will be placed with an award in 200 bps to profitability of treasury bonds of the USA with similar circulation period; it means that profitability of the Saudi bonds will make 3,34%. By estimates of the Saudi officials, a kingdom budget deficit which by the end of 2014 made only 44 billion rials ($11,7 billion), or 1,6% of GDP, can reach 50% of GDP by 2020.

According to credit analysts, the amount of placement of the first in the history of the international bonds of Saudi Arabia will depend on three factors — prices of oil, volatility in the market, and also financial reserves of the kingdom. The last were constantly reduced since February of last year when their level made $737 billion, and by the end of the year made $640 billion. The volume of financial reserves continues to fall against the low prices of oil and expenditure of Saudis for military operations in Yemen and Syria. It increases risks that Riyadh will untie rial from US dollar, observers claim. Earlier such decision was made by other petrodependent economy which didn't sustain falling of oil quotations: On December 21, 2015 the currency to free swimming was sent by Azerbaijan.

If market conditions improve, debut placement of the kingdom can become one of the most successful in the bonded market. If prices of oil continue falling, and the Saudi reserves — to be reduced, release will be limited by several billion dollars which the country will borrow at the overestimated rates.

The authorities also consider possibility of privatization of the largest production of the oil company on volume in the world of Saudi Aramco. During IPO corporation it can be estimated at $2-3 trillion, the analyst of BNP Paribas Andrew Makfarlan considers. Thus, the sales proceeds even will be enough 5% of shares of the company for a covering of annual deficiency of the country. Nevertheless initial public offering it isn't declared yet and the accurate plan of IPO still isn't present. Loan in the foreign debt markets is considered a question of closer prospect.

Oleg Makarov

Source: http://www

Tags: oil , Saudi Arabia

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