Saudi Arabia’s $17.5 billion bond brings together oil, geopolitics and the search for yield
Want a single instrument that wraps together nearly every big political, financial and economic theme in today’s world? Saudi Arabia’s mammoth $17.5 billion bond issue, marking its debut in international markets, is it.
The size of the deal is impressive but actually the least important thing about it. Big bond deals tend to build a momentum of their own. But it does speak to the search for yield. The $6.5 billion 30-year portion of Saudi Arabia’s bond is set to pay 2.1 percentage points more in yield than a comparable U.S. Treasury, or around 4.6%. That is a sizeable pickup in a world where developed-market bond yields are on the floor or in negative territory.
That Saudi Arabia is doing the deal at all is a more telling factor: The oil bounty that has propelled the economy has run dry. The 18-month-long rout in oil prices that started in 2014 sent the country hurtling from a budget surplus to a deficit in 2015 of 15.9% of gross domestic product that is set to narrow only to 13% in 2016, according to the International Monetary Fund. In 2013, government debt stood at just 2.2% of GDP, according to Moody’s. By 2017, it is forecast to be 22.9%. The level isn’t a source of concern, but the swift change shows the country’s stark reversal of fortunes.
In the near term, buyers of the bonds are betting largely on oil. Swings in the price are likely to have a direct impact on the perception of Saudi Arabia as a credit. The recovery in oil prices, which stand close to their high of the year, has eased concerns about financial stability and helps explain some of the enthusiasm for the deal.
desperate times call for desperate measures..
“The oil bounty that has propelled the economy has run dry. The 18-month-long rout in oil prices that started in 2014 sent the country hurtling from a budget surplus to a deficit in 2015 of 15.9% of gross domestic product that is set to narrow only to 13% in 2016, according to the International Monetary Fund.”
sell the farm?