Saudi Arabia’s Wobbly Wellspring Tap

Saudi Arabia’s debut external sovereign bond size surpassed Argentina’s return by $1 billion at $17.5 billion for this year’s and the historic record, and was four times oversubscribed for a 3.25 percent yield, just 25 basis points above peer investment-grade rated Qatar. The 30-year sold more than the 10-year maturity with the paucity of positive return long-term global alternatives, and 5 billion was immediately funneled to local banks to relieve liquidity strains. Officials signaled on the road show a $10 billion annual borrowing program, as they presented a 200-page prospectus detailing the 70 year oil reserve supply and economic diversification and rationalization under the King’s next decade transformation strategy. The proceeds will only cover one-third of the current 15 percent of GDP budget deficit with petroleum prices still under the $60 per barrel break-even, and central bank holdings have fallen $100 billion the past year to cover the bill as plans to cut public sector wages and flagship infrastructure projects are slowly applied. The state oil behemoth Aramco may float shares in the medium-term under the modernization and transparency campaign, and foreign institutional participation will soon be expanded, but the stock market was relatively unmoved by the existing and prospective securities wave and remains at a discount to the MSCI average. The iShares ETF is off double-digits as investors complain that both companies and the government continue to lag on account and information disclosure. Domestic interest rates at 2 percent are almost triple the 2015 level and could rise further with Federal Reserve tweaking under the dollar currency peg. Gradual energy and utility subsidy adjustments have ratcheted inflation to 5 percent on 1 percent GDP growth.

 UAE equities were ahead 5 percent on the MSCI index through mid-October, but banks are in a similar squeeze on hydrocarbon and fiscal retrenchment, with loans due to increase just 5 percent annually. Government deposits can contribute one-third of institution funding, and it has unveiled a big housing push to sustain momentum. The tougher climate sparked the First Gulf-National Bank merger, the largest consolidation since the 2008 crisis, which will still leave the ruling family in control. Bad loans are 5 percent of the total, and real estate and construction account for 30 percent of portfolios, and reported capital adequacy is 15 percent of assets, 3 percent over the minimum. The non-oil PMI manufacturing gauge is well over 50 and growth should come in around 2.5 percent in 2016, but consumer sentiment is lackluster in advance of scheduled VAT tax introduction.

Qatar shares were marginally positive with its rating superiority over Saudi Arabia and 2022 FIFA World Cup preparation moving full steam for 3 percent growth. Organizers are portraying the event as a diversification showcase beyond sports into education, finance and culture. Debt issuance will slow in 2017 as the projected budget gap halves to 2 percent of GDP with a new airport tax bringing in revenue. A $9 billion Eurobond went smoothly in May but may not be repeated next year as domestic banks provide lines. Al-Jazeera TV closed its US operation and followed other state entities in slashing jobs, including museums which could not compete with athletic attractions.

Posted in