By Anthony Tokarz,
Money and Investing Writer
The Saudi Arabian government excited global markets Wednesday, October 19, when it launched the sale of $17.5 billion in sovereign government bonds in its first turn to international markets for financing.
Investors and analysts all over the world have since not ceased remarking on two characteristics of the securities: their size and their importance. As regards the latter point, the Wall Street Journal reports that this instrument “wraps together nearly every big political, financial and economic theme in today’s world.”
The Saudi finance ministry has been laboring to diversify the nation’s assets in the wake of oil’s caving value, following in the footsteps of the United Arab Emirates, which began taking steps years ago to alleviate the consequences of outsize dependence on the export of its “black gold”.
This bond sale eclipses Argentina’s issuance of $16.5 billion in bond in April, and coheres with the young new finance minister Ibrahim Al-Assaf’s recent strategy of opening his nation’s markets to the world. In July, investment banks worked themselves into a frenzy trying to outcompete each other for the right to bring the world’s flagship oil company, the $2 trillion behemoth Saudi Aramco, public in an IPO already christened “The Biggest IPO Event in Wall Street History.”
Investors have taken every opportunity to insert themselves into the affairs of the Kingdom since. According to people familiar who worked on the bond sale, international investor bids totaled a gargantuan $67 billion.
Patrick Dennis, the lead Middle East economist at London’s Oxford Economics, has postulated that Saudi Arabia has turned to overseas financing to avoid the tightening of liquidity which annoyed Saudi banks following the latest issue of domestic bonds. Saudi banks probably share their excitement with foreign investors.
The 30-year maturity bonds, of which Saudi Arabia issued $6.5 billion, offer a juicy yield of 4.6 percent at a time when investors expect bonds to drag along the floor of near-zero returns that sometimes slip into negative territory.
US 30-year treasury bonds yield just 2.5 percent in comparison. This might explain why the Saudi offering has drawn so broad a base of investors—Asian central banks, European private funds, and Middle Eastern commercial and investment banks all joined the usual emerging-market bond managers.
In addition to its 30-year bonds, the Kingdom has issued $5.5 billion in five-year maturity bonds that pay an annual interest of 2.375 percent, and another $5.5 billion in 10-year bonds that pay 3.25 percent.
According to Dawn, “The effective annual interest rate is 2.588pc on the five-year bonds, 3.407pc on the 10-year bonds, and 4.623pc on the 30-year bonds.”
Besides revealing that it is suffering from the collapse of oil prices, and the budget surplus once buoyed by them, Saudi Arabia has signaled through its bond sale that it has committed to reconstructing its economy to minimize its dependence on oil. It follows that investors and politicians alike will ask whether the Desert Kingdom can accomplish this while maintaining its social and political stability.
Citizens have grown accustomed to oil as the foundation of Saudi vitality, and the buyers of the recent bonds expect that a rebound in oil will drive Saudi Arabia’s recovery.
Saudi Arabia will most likely look to monkey its eastern neighbor, the UAE. In that case, the financial community can expect increased investment in tourism and retail. However, the Kingdom must remain wary of slipping down the path of Russia, which sells billions in bond each year to grease the wheels of its slowing economy.
A version of this article appeared in the Tuesday, October 25th print edition.
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