Saudi Arabia issues $12bn international bonds as it seeks to diversify funding

The triple-tranche debt issuance was oversubscribed 2.5 times, attracting $30 billion

Saudi Arabia has forecast financing needs of about 86 billion Saudi riyals ($22.93 billion) in 2024 under a new borrowing plan. Reuters

Saudi Arabia's National Debt Management Centre has completed the issuance of $12 billion worth of international bonds as the kingdom seeks to bridge the widening budget deficit.

The triple-tranche bond offering was oversubscribed 2.5 times as the order book reached $30 billion, NDMC said on Tuesday.

This transaction is part of the strategy to diversify the investors' base and meet the kingdom's financing needs from international debt capital markets efficiently and effectively, it said.

The value of the first tranche was $3.25 billion for a six-year bond maturing in 2030. The second tranche totalled $4 billion for a 10-year bond maturing in 2034 and the third totalled $4.75 billion for a 30-year bond maturing in 2054.

The bond issuance is the first this year under the kingdom’s global medium-term note programme.

“The bid-to-cover ratio reflects the strong demand of the kingdom's issuances, confirming the investors' confidence in the strength of the kingdom's economy and its investment opportunities future,” the NDMC said.

Last month, Saudi Arabia approved its general budget for the 2024 fiscal year, which forecast a deficit of 79 billion Saudi riyals ($21.1 billion), accounting for about 1.9 per cent of the country's gross domestic product.

The Arab world’s largest economy estimated total revenue at 1.17 trillion riyals next year, while total expenditure is projected at 1.25 trillion riyals, the kingdom’s Ministry of Finance said at the time.

The kingdom reported a budget deficit of 2.91 billion riyals for the first quarter of last year.

In October, Saudi Arabia revised its growth forecast for 2023 and expects a budget deficit this year as it boosts spending.

The kingdom's budget deficit widened in the third quarter by about seven times on a quarterly basis as oil revenue fell amid production cuts.

The total budget deficit in three months to the end of September reached 35.8 billion riyals, compared with 5.2 billion riyals in the second quarter, the Ministry of Finance said in a budget update last month.

The 2024 national budget aims to boost growth in the non-oil economy by increasing spending and investment in infrastructure, local industry and services, Saudi Arabia's Crown Prince Mohammed bin Salman said, as reported by SPA.

He said the government is also working to boost its reserves and maintain a sustainable level of public debt.

The budget’s higher spending for next year aims to boost growth, Prince Mohammed said.

The kingdom estimates financing needs of about 86 billion riyals in 2024 under a borrowing plan approved by Finance Minister Mohammed Al Jadaan, the NDMC said earlier this month.

The government will “continue domestic and international fiscal operations to bridge the expected 2024 deficit and repay debt due during 2024 and in the medium term”, Mr Al Jadaan said in December.

“The government also aims to take advantage of available market opportunities to provide additional financing to repay debt obligations in the coming years.”

Analysts expect larger deficits than official estimates.

“We expect Saudi Arabia to run a deficit of 4.3 per cent of GDP this year, up from 1.9 per cent in 2023, as ambitious development plans will require continued investment spending,” Khatija Haque, head of research and chief economist of Emirates NBD, wrote in a recent note.

Saudi Arabia is developing a number of new projects as it focuses on diversifying its economy away from oil.

The projects span sectors such as property, tourism, entertainment and infrastructure, warranting a greater need for funding.

On top of the list is Neom, the vast $500 billion city that is the kingdom's new destination on the Red Sea. Spanning 26,000 square kilometres, it will be more than twice the size of Lebanon.

The kingdom's new bond issuance comes at a time when many borrowers are seeking to lock in lower funding costs following a steep drop in US Treasury yields since October.

While the Federal Reserve is widely expected to start cutting interest rates this year, pushing down yields even further, that is not expected before the second half of this year.

Saudi Arabia’s economy, which grew by 8.7 per cent last year, the highest annual growth rate among the world's 20 biggest economies, is expected to expand by 0.8 per cent in 2023, according to the International Monetary Fund.

The kingdom, which benefitted from the rally in crude prices last year amid the Ukraine war, has cut oil output in an attempt to stabilise the market.

The country's economy contracted by 4.5 per cent annually in the third quarter, dragged down by oil production caps.

However, the non-oil economy expanded by 3.9 per cent in the three months to the end of September, according to the General Authority for Statistics data.

Saudi Arabia's non-oil economy expanded in December as new orders rose at their fastest pace in six months, amid the kingdom's continued diversification efforts.

The headline Riyad Bank purchasing managers' index reading stood at 57.5 for the second month running in December, remaining well above the 50-point neutral mark that separates expansion from contraction.

The IMF expects the kingdom's non-oil economic growth to remain close to 5 per cent in 2023, spurred by strong domestic demand.