Probable Sources to Fill the Saudi Budget’s Deficit

Debt issuance (s) has kept playing a pivotal role, in the last five years, in financing the Saudi budget deficit.

If we are to look at how countries finance their respective deficits, we would find that they resort to several options, including:

1 – Issuance of debt instruments and loans (borrowing).

2 – Drawback from their foreign reserves.

3 – Sale of assets, especially, the external, and privatization.

Retrospectively and precisely before 2017, Saudi Arabia used to resort to financing a large part of its budget deficit, by drawing from the foreign reserves.

Foreign reserves

However, following Saudi Arabia becoming, among the most prominent member of the issuers’ club, amidst the emerging markets, in terms of the fixed income tools, the pace of withdrawal from the foreign reserves has, sharply, decreased.

The latest step was a very wise shift, because the more foreign reserves fall to a certain range, the more international speculation would be about the continuity (rationality) of pegging the national currency (Saudi Riyal) to the US Dollar.

Consequently, eight years later, foreign reserves of Saudi Arabia began to rise, rebuild and stand, according to a Bloomberg report, published in November 2021, surging to a level of $465 billion, since, compared to their lowest level of $437 billion.

N.B. (Foreign reserves have peaked, at about $750 billion, in mid-2014.)

What about the current (incoming) fiscal year?

Funding requirements for the current (incoming) fiscal year, would amount to a whole sum of SR141 billion, as the annual borrowing plan, drafted by the National Center for Debt Management, on behalf of the Ministry of Finance, indicated.

Accordingly, this deficit shall be financed through debt issuance (SR124 billion), benefiting from the resilience of the Saudi sovereign credit rating, due to Riyadh appropriate pricing for its debt instruments.

That annual borrowing plan pointed out that the remaining projected deficit would be financed through drawback from the government reserves.

Government reserves, subsequently, will once again play a role to fill the gap, during the Q4, up to SR17 billion, in case the initial expectations of the annual borrowing plan continue, as set, in the light of high average oil prices.

Mindful that, till at the end of the Q3, no withdrawal has ever taken place, from the current accounts or the government reserves.

Backed Loans

For the second year in a row, Saudi Arabia use the option of securing backed loans (in the form of guarantees from export credit agencies, which are (usually) at a lower financing cost, compared to the prices to be secured by the Kingdom (with traditional syndicated loans), based on its credit rating.

Those secured backed loans are among various sources of financing, that would lead to reducing the cost of financing on the state treasury.

We, really, look forward to seeing such advanced financing product, in full play, over the year, to come.

Fixed return of the public debt

With observers expecting the Federal Reserve Board to raise interest rates, during the next year, it is expected, too, that Saudi Arabia will reveal its updated percentage of “variable interest”, related to the public debt portfolio.

We should consider that the tools, with fixed returns, have constituted as much as 82% of the total debt portfolio, by the end of 2020.

Pricing debt instruments, at a fixed return, means that the investor knows the amount, that he shall receive, over a certain period.

Issuers tend toward fixed return, to lock in on a fixed rate, when interest rates are low.

As for debt instruments priced with a moving or variable interest, they are re-priced (every 3-6 month) according to the measuring index, in play.

Investor base

With Saudi Arabia relying on multiple funding sources, during the Q1 of 2022, it is widely expected that it would reveal statistics about diversifying the base of investors, who have exposure to Saudi credit.

For example, during 2020, Saudi Arabia succeeded in increasing the base of international investors, by 12.4%.

The impact of such a step was fundamental, as it had a positive impact on the pricing of new or existing debt instruments, listed on local, regional, and global stock exchanges, as well.