The recovery in oil prices has boosted investors’ appetite for Saudi Arabia’s public debt abroad, allowing the kingdom to borrow at negative interest rates for the first time.
The kingdom raised 1.5 billion euros, or 1.8 billion dollars, through a bond sale on Wednesday. The yields were minus 0.057% for three-year debt and 0.646% for nine years, the cheapest borrowing costs it has achieved to date. This is the second time it has issued bonds in euros.
Saudi Arabia, one of the world’s most oil-dependent countries, has regularly turned to international bond markets since 2016 to balance its budget amid fluctuations in the price of crude. Its economy contracted 3.9% last year when the coronavirus pandemic hit global energy demand, according to estimates by the International Monetary Fund, leaving it with a budget deficit of 12% of economic output in December.
The government has presented a plan to cut this deficit by more than half by cutting spending this year. Its decision to issue in euros is likely part of this, analysts said.
The eurozone has had a negative policy rate since 2014, which acts as a benchmark for sovereign and corporate debt, reducing the cost of borrowing in euros in general. Governments and companies around the world often turn to Europe’s bond market for cheaper funds. China was able to borrow at negative rates for the first time last year in a three-part sale of euro-denominated debt.
“It makes sense for them, they diversify their funding base and get a significantly lower cost of funds,” said Zeina Rizk, CEO and portfolio manager of fixed income at Arqaam Capital in Dubai. The size of Wednesday’s issue is surprisingly small, but the size of the order book showed demand was still there, he said.
The Saudi Arabian economy is expected to recover as oil prices recover. HSBC economists expect gross domestic product to rise by as much as 4% in 2021.
The world’s benchmark Brent crude has soared more than 26% so far this year, bringing the price back to pre-pandemic levels. Members of OPEC and a group of large producers outside the Russian-led cartel have largely maintained production cuts that were implemented to reduce supply and support prices as the pandemic crushed energy demand. In December they agreed to a very moderate increase of half a million barrels a day.
In a surprise move, Saudi Arabia said last month that it would further reduce its production by one million barrels per day. Adverse winter weather in Texas further reduced the world’s crude supply as pipelines and equipment in the shale oil fields froze, although this has largely recovered in recent days.
“Saudi Arabia seems to have a lot of control over the price of oil at the moment; they obviously have quite a lot of spare capacity, ”said Kieran Curtis, emerging markets fund manager at Aberdeen Standard Investments. He said he hopes Saudi Arabia can increase production as the world economy recovers and energy demand recovers.
Advisers to the kingdom told The Wall Street Journal that this is currently being considered and that Saudi Arabia’s production may increase in the coming months.
“They’re coming into this from a position of strength,” said Mohieddine Kronfol, a portfolio manager at Franklin Templeton with a focus on Middle East bonds. “Financially they have dealt with the virus quite well; we are beginning to see a recovery. They have managed to contain the consequences of the volatility of the oil price.
He is overweight in Saudi bonds, which means that the fund he manages has more than the benchmark it tracks.
Still, for some investors, the returns are too low to interest them.
“We do not believe these bonds offer much value due to the tight spreads,” said Joseph Mouawad, Carmignac’s international bond fund manager. But for investors who simply invest in euro-denominated bonds, Wednesday’s issuance could make sense, he said.
“It has many mandates and cash that must be used in fixed income instruments. These euros need a house, “he said. “With most of the European sovereign space in negative territory, the safer emerging market countries seem increasingly attractive.”
Write to Anna Hirtenstein at [email protected]
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