Bloomberg News

Saudi Arabia May Tap Reserves for Spending Plans: Arab Credit

October 04, 2011

Oct. 4 (Bloomberg) -- Saudi Arabia, the world’s largest oil exporter, may be forced to tap its reserves to fund spending programs as oil drops below the kingdom’s breakeven budget price.

King Abdullah this year announced a $130 billion plan to create jobs and build homes after uprisings toppled leaders in Tunisia, Egypt and Libya. While officials haven’t said whether they’ll sell debt or draw on reserves, as they did two years ago, an oil price below an $85 to $90 breakeven level as estimated by Citigroup Inc. may force them to act.

The central bank’s total assets fell 0.3 percent to 1.93 trillion riyals ($515 billion) in August from July, according to data from the Saudi Arabian Monetary Agency. It was the first monthly decline since February, when the assets fell 0.4 percent. The Riyadh-based bank didn’t respond to telephone calls and a fax seeking comment on the reason for the decrease.

“The only reasonable explanation is that they have drawn down their assets to help fund government spending as happened earlier during the financial crisis,” Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank, said in a phone interview. “Lower oil prices don’t only explain the decline.”

Saudi Arabia, which depends on oil for 86 percent of its revenue, tapped reserves in 2009 to maintain spending as the worst financial crisis since the Great Depression pushed oil prices as low as $34 a barrel. Then, the bank’s total assets dropped 8 percent to about 1.6 trillion riyals as the kingdom deployed a five-year $400 billion stimulus package.

Saudi Buffer

Finance Minister Ibrahim al-Assaf said government revenue will cover increases in spending this year, al-Eqtisadiah reported Oct. 2. In May, al-Assaf said the kingdom wouldn’t need to tap its reserves to finance spending, including a five-year $384 billion development plan, unless revenue slowed.

When al-Assaf made his comments five months ago, crude oil was trading above $100. Prices have declined more than 30 percent from a high this year of $113.93 a barrel in April and were trading at $76 a barrel in electronic trading in New York.

“The reserves provide a buffer for the government to meet its spending commitments in the event of a shortfall in revenues,” said Paul Gamble, head of research at Riyadh-based Jadwa Investment Co. “There’s no reason to get in debt if you have savings you can use. While they have such huge savings, they will always prefer to draw these down than issue debt.”

No International Debt

The cost of insuring Saudi debt against default has dropped seven basis points from a 19-month high of 143 reached in February, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a borrower fail to adhere to its debt agreements. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

Even though Saudi Arabia has no international debt there is trading of credit-default swaps linked to the kingdom as investors seek to protect against the risk of political turmoil in the world’s biggest oil supplier. Swaps are being used to speculate on contagion from upheavals in neighboring countries, as a proxy for government-controlled companies such as petrochemical maker Saudi Basic Industries Corp. and to hedge debt the nation may sell in the future.

Saudi Aramco

The average yield on sovereign bonds in the Middle East jumped 23 basis points last month to 4.93 percent Sept. 30, according to the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond Index. The rate was at 4.97 percent yesterday. The average cost of insuring the region’s sovereign debt rose 56 basis points in the period to 311, compared with 288 at the end of September for debt in the Asia-Pacific region, according to data provider CMA.

Final pricing on Saudi Aramco Total Refining & Petrochemical Co.’s sukuk was set at 95 basis points over the six-month Saudi Arabian Interbank Offered Rate, Deutsche Bank AG said on its website Oct. 1. The six-month Saibor rate was 0.7 percent on Sept. 29.

The Saudi economy has benefited from government spending and will grow 6.5 percent this year, compared with 4.1 percent in 2010, the Washington-based International Monetary Fund said in a review of the Saudi economy in August.

Saudi Arabia should “issue bonds even if they don’t have immediate financing needs, particularly to build up a yield curve for local corporates,” Gamble said.

‘New Downturn’

The kingdom has just seven corporate bonds traded on the stock exchange. Saudi Basic Industries, the largest petrochemical maker in the world, and Saudi Electricity Co. are among four companies with bonds listed on the Saudi exchange. The nation’s first corporate bond issue took place in 2003.

Saudi Arabia is concerned that global economy “maybe entering in a new downturn of fear and weakness, especially in the big financial institutions in Europe,” central bank Governor Muhammad Al-Jasser was cited on Sept. 28 as saying in the interview with Asharq al-Awsat.

Saudi Arabia is seeking safer foreign-asset classes in response to the global economic uncertainty, said Turki Fadaak, head of research at Riyadh-based Albilad Investment Co.

The central bank’s holdings of foreign securities gained 0.8 percent to a record 1.36 trillion riyals in August from July, central bank data show. SAMA’s foreign currencies and gold assets increased 6.1 percent to 169.3 billion riyals in August from July, according to central bank data.

Saudi Arabia may report a fiscal surplus of 1 percent of its gross domestic product this year on stable non-oil revenue as expenditure grows by 40 percent, Citigroup Inc. analyst Farouk Soussa said in a note to clients on Sept. 29.

“We remain confident that Saudi Arabia has the fiscal space to absorb these deficit either through resorting to its considerable fiscal assets or through borrowing,” Soussa said.

--With assistance from Dana El Baltaji and Claudia Maedler in Dubai and Heather Langan in London. Editors: Andrew J. Barden, Riad Hamade.

To contact the reporters on this story: Mourad Haroutunian in Riyadh at mharoutunian@bloomberg.net; Glen Carey in Dubai at gcarey8@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Heather Langan at hlangan@bloomberg.net; Shaji Mathew at shajimathew@bloomberg.net


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