Business

World’s lowest debt-to-GDP ratio seen aiding Saudi debt sales

Biggest oil exporter used the windfall from crude exports to slash its debt to GDP ratio to less than 2 per cent.

Bloomberg

June 24, 2015

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Saudi Arabia has the world’s lowest debt to economic output ratio - for now.

With oil prices tumbling and the kingdom burning through currency reserves at a record pace, economists from Bank of America Merrill Lynch to Abu Dhabi Commercial Bank expect authorities to start raising money through the local bond market to cover a widening budget deficit.

The potential sales will help create a benchmark for corporate borrowers. They may also be a boon for investment bankers after bond issuances in the six-nation GCC dropped by 34 per cent this year to $15.2 billion, data compiled by Bloomberg show.

“At the moment, they’re tapping their reserves and it’s certainly something you could see coming,” said Monica Malik, chief economist at ADCB in Abu Dhabi. “You’d expect a gradual build-up in debt.”

The world’s biggest oil exporter hasn’t sold securities with a maturity of more than 12 months for eight years as it used the windfall from crude exports to slash its debt to GDP ratio to less than 2 per cent.

Government-linked agencies and companies typically tap the Shariah-compliant debt market. Sales are likely to be denominated in local currency, Ms Malik said.

“Saudi Arabia does have an advantage over many regional peers in that they have large domestic institutional investors that could support debt markets,” said Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk and Mena fixed-income at Franklin Templeton Investments. “They have pension funds, insurance companies and large family offices.”

The IMF estimates that the kingdom’s budget deficit will widen to about 20 per cent of economic output this year after King Salman ordered a two-month bonus for public-sector workers and pensioners.

The government is pressing ahead with an investment programme to boost non-oil GDP growth. Military spending is likely to rise as the kingdom leads airstrikes against Shiite rebels in Yemen.

For now, the government is financing its budget shortfall by drawing down its deposits at the central bank, accelerating the decline in currency reserves. Net foreign assets dropped more than $11 billion in April, taking their three-month plunge to more than $45 billion - about 7 per cent of the total.

Officials haven’t announced plans to tap the bond market.

If the kingdom chose to tap the international sukuk market, the sale will be very “well received” by investors, Abdul Hussain, chief executive officer of Mashreq Capital DIFC, said by phone from Dubai. The kingdom is rated AA- at Standard & Poor’s, the fourth-highest investment grade.

“They have a very strong credit rating, very little external debt,” said Mr Hussain. “You could not get a stronger profile in the neighborhood.”

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”