$50 Billion Saudi Debt Drive Shows Rising Financial Crisis

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(Bloomberg) — Even as Wall Street heavyweights flock to Riyadh for a Davos-like conference, Saudi Arabia faces low oil prices, a budget deficit and challenges attracting foreign investment.

That forces the state to rely heavily on another source of funding: debt.

Saudi Arabia’s government and entities such as its Public Investment Fund have issued nearly $50 billion in bonds by 2024, according to data compiled by Bloomberg, which includes corporate and private sales in U.S. dollars and euros. That turmoil has made the oil-rich country one of the largest international debt issuers in emerging markets this year. It is likely to borrow tens of billions of dollars more by 2025, according to Nadim Amatouri, director of income research at Arqaam Capital.

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This week, the monarchy kicks off its annual Future Investment Initiative, an event that will draw global names such as David Solomon of Goldman Sachs Group Inc., Jane Fraser of Citigroup Inc. and President of Alphabet Inc. Ruth Porat. It will provide a glimpse into the appetite of investors in Saudi Arabia as the country moves to wean itself off oil in the face of mounting financial challenges.

Crude has been trading below $100 a barrel, despite the kingdom cutting supply along with other members of the OPEC+ cartel, and hundreds of billions of dollars being spent on Crown Prince Mohammed bin Salman’s Vision 2030 economic reform plan.

International investors have so far been slow to invest in key projects such as the Neom new city.

The inflow of foreign direct investment was the lowest since 2020 last year and has stopped in the first half of 2024, making credit even more important for Riyadh’s projects and development.

“Deficit funds are intended to continue debt in many government-related institutions, so that there is an opportunity to use new bond issuance and corporate debt,” said Karen Young, a senior research fellow at Columbia University’s Center on Global Affairs. Energy Policy.

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The government itself admits that low oil prices and huge spending needs will squeeze its finances. It expects to post fiscal deficits at least until 2027 as it prioritizes spending on diversifying its economy.

It said it would continue to borrow to cover the deficit and would look for additional funds to help restore major projects.

S&P Global Ratings said the kingdom remains in a good position to issue more bonds, as its gross domestic product debt level remains low compared to many other countries. The ratings company recently upgraded its outlook for the country to stable.

However, the debt-to-GDP ratio is expected to reach about 30% next year, according to the International Monetary Fund. While that is low by world standards, it is more than double the national average over the past decade.

Analysts say Saudi Arabia will need to show a strong track record and prove its projects are feasible to attract more foreign investment.

Foreign direct investment inflows reached about $9.7 billion in the first half of 2024, according to preliminary data. In order to meet this year’s goal of attracting 29 billion dollars, the state will need to see its largest second half issuance in history.

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Among Riyadh’s funding options would be to introduce an income tax, a move Gulf states have long sought to avoid. The IMF suggested that a property tax could also help boost non-oil revenues.

To be sure, the government said that last year’s FDI inflow exceeded the targets based on the new approach.

Still, the government needs crude prices to be above $96 a barrel to balance its budget this year, according to the latest IMF estimates. This figure is even higher, at around $112, when considering PIF’s domestic spending, according to Bloomberg Economics.

Brent crude is trading at around $71 a barrel, underscoring the role that debt will continue to play in the nation’s ambitious plans.

“The Saudi strategy under Vision 2030 depends on oil as a financial resource,” said Kristin Diwan, senior fellow at the Arab Gulf States Institute in Washington. “In that sense, debt issuance is important for financing and accelerating reforms.”

—Courtesy of Selcuk Gokoluk.

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