Business & Money | Saturday 11 July, 2015 5:14 am |

The Kingdom’s sale of bonds worth SR15 billion to local banks this year was welcomed by Riyadh-based economists on Friday as a strategic move that could reshape its financial markets.

While a few state agencies or state-controlled firms have issued bonds in the past few years, the government’s last sovereign development bond was issued in 2007.
“For the development of debt capital markets, issuance should continue and involve a variety of buyers,” said John Sfakianakis, Middle East director at Ashmore Group. 
His remarks came as Saudi Arabian Monetary Agency Gov. Fahad Al-Mubarak indicated increased government borrowing in coming months.
Sfakianakis added: “It’s an important step motivated by balancing the fiscal needs of the economy by tapping into alternative sources of revenues besides reserve assets.”
He said: “The pace of the issuance of debt will determine the fiscal shortfall that would be funded by reserve assets. It’s expected that the budget deficit would amount to more than SR400 billion. 
“Issuing debt is healthy but also needed given that it reduces reserve depletion. Equally important, it would eventually help deepen the debt market which would help monetary policy transmission and have a benchmark yield curve.”
The Kingdom faces a huge budget gap this year, which Al-Mubarak said was expected to exceed the originally projected SR145 billion. The International Monetary Fund has estimated the deficit will be about 20 percent of GDP, or around $150 billion.
Fahad M. Alturki, chief economist and head of Research at Jadwa Investment, commented: “The government is now expected to issue debt as part of its deficit financing strategy. This change of strategy comes as the Kingdom takes advantage of its solid credit profile, which has been affirmed by the major rating agencies.”
He added: “While we expect the government to maintain its expansionary fiscal strategy, the net effect of lower oil prices and higher oil output is a deeper deficit on the fiscal budget.”
Alturki said: “The fall in oil revenues will lead to a fiscal deficit of SR397 billion, or 15.6 percent of GDP in 2015. The current account is also heading for its first deficit since 1998, although it is expected to be small, at $23.1 billion, or 3.4 percent of GDP.”
Despite the prospect of recording twin deficits in 2015, large foreign reserves of SR2.7 trillion ($714 billion) held by SAMA, as the end of February 2015, should provide enough confidence for the government to sustain an elevated level of spending during 2015 and beyond.”
He said: “We see plenty of room for the government to raise debt given its strong credit ratings and record low debt levels. We forecast public debt increasing to 9.6 percent of GDP by the end of this year as the government shifts its financing strategy from using foreign reserves to raising debt to finance its deficit.
Initially at least, the bond sales will not tighten banking system liquidity much, analysts told Reuters.
Saudi banks have plenty of room on their balance sheets to buy government debt, suggesting that commercial banks had SR1.65 trillion of deposits at the end of May, against SR1.31 trillion of lending to the private sector.
So far Riyadh has mainly been running down its financial reserves to cover the deficit and the SAMA chief that the government had withdrawn SR244 billion from reserves in 2015.
This has cut the foreign assets held by SAMA. Its net foreign assets — mostly US dollar bank deposits and bonds — fell to $672 billion in May. The start of Saudi bond sales means pressure for the reserves to fall may now decrease.