Tweet This
With its back against a fiscal wall, Saudi Arabia offered $17.5 billion in bonds on the international market on Wednesday. It’s the largest bond sale on record from an emerging market, topping Argentina’s bond sale in April of $16.5 billion. The amount exceeds previous estimates which had placed the bond offering anywhere between $10 billion and $16 billion.
The government sold dollar-denominated bonds due in five years yielding 135 basis points more than similar-maturity U.S. Treasuries, 10-year notes at a spread of 165 basis points and 30-year securities at 210 basis points. Saudi Arabia is rated A1 at Moody’s Investors Service, the fifth-highest investment grade and two-notches below Qatar.
The bond offering comes as the kingdom grapples with a more than two-year down tick in global oil prices amid historically high global oil production and corresponding record high oil inventory levels.
Due to the low price environment and what can arguably be called the worst oil market crash in a generation, Riyadh has posted record high budget deficits, $98 billion last year, equal to 15% of its GDP, and an estimated $87 billion this year.
Saudi Arabia’s financial problems are mounting, according to many experts, while some have recently told me that unless Riyadh gets its financial house in order, there is even a possibility of economic collapse for the Middle Eastern country of 33 million people.
Reza Yeganehshakib, a professor of Middle Eastern studies at Fullerton College and a geopolitical and energy analyst, told me over the weekend that “the Saudis have a few options to prevent an economic crash and a feasible social unrest.”
Some of those options, according to Yeganehshakib, include an economic diversification plan. But for that to work, he said, the government would have to cut its massive subsidies program to its population, adopt family planning and population control, decrease its foreign war expenditures, and lower its massive military budget.
Dilemma of its own making
However, much of the blame for Saudi Arabia’s fiscal woes can be placed on its own doorstep. When oil markets were initially becoming over supplied in 2014, Saudi Arabia abandoned its historic role that November as the world’s global swing oil producer and instead of trimming production it increased output - and has been increasing production ever since to record high levels.
The kingdom’s aim was to drive U.S. shale oil producers, whose oil production break-even points are considerably higher than Saudi Arabia’s, out of the market.
However, U.S. shale oil producers have clawed their way back, trimming costs, getting more oil from existing wells and lowering their production break-even price points, in effect taking more control of global oil markets from Saudi Arabia and OPEC and also rendering less effective any kind of production cut OPEC would seek to put in place.
Goldman Sachs issued a report last month forecasting that by the end of 2017 U.S. shale oil production would increase as much as 700,000 barrels per day (bpd), effectively wiping out all lost U.S. shale production in the previous three year period.
