Saudi Arabia races through financial toolkit to raise funds

Bloomberg

Saudi Arabia’s plans to bolster its finances are taking on a new sense of urgency as lower oil prices put the economy under more strain than at any other time in the past decade.
In recent weeks, the kingdom raised a $10 billion loan, clamped down on currency speculators and informed banks of plans to raise as much as $15 billion in its first international bond sale, people with knowledge of the matter said. It’s also said to be contemplating IOUs to pay contractor bills and hired HSBC Holdings Plc banker Fahad Al Saif to set up a new debt office. The speed of the measures underscores Deputy Crown Prince Mohammed bin Salman’s urgency to shore up the country’s finances as an era of oil-fueled abundance falters. Though currency reserves remain strong — among the world’s largest — net foreign assets are at a four-year low after declining for 15 months in a row and the kingdom may post a budget deficit of about 13.5 percent of economic output this year.
“The pace of the decline in Saudi Arabia’s foreign assets is faster than in previous oil downturns and the period over which they’ve been falling is longer,” Raza Agha, VTB Capital’s chief economist for the Middle East and Africa, said by e-mail. “This generates a real sense of urgency to get the ball rolling in raising external funding.”

Hydrocarbon Windfall
Five years ago, oil surged to more than $100 a barrel, adding billions of dollars to the country’s reserves. The windfall allowed the kingdom to slash its debt and post an average budget surplus of 8.2 percent between 2000 and 2012, according to International Monetary Fund data. Now, with crude having tumbled about 50 percent, the country is moving to sell assets and find other ways to raise funds.
Net foreign assets at the central bank fell 1.1 percent to $572 billion in April after slumping by $115 billion in 2015, when the kingdom ran a budget deficit of nearly $100 billion. Holdings in U.S. stocks slumped to $52.4 billion in June 2015, from about $78 billion a year earlier, according
to a report from the U.S. Treasury
Department.
The next step is turning to the international markets for funding. In April, it sealed a $10 billion loan — its first in at least 15 years — from a group of U.S., European, Japanese and Chinese banks, people familiar with the matter said at the time. It’s also weighing the sale of as much as $15 billion of bonds this year, separate people said last week.
“Saudi has many options to finance its fiscal gap and it is using all means at its disposal to do that,” said Philippe Dauba-Pantanacce, a senior economist and global political analyst at Standard Chartered Plc in London. “After years of absence from the bond market, Saudi Arabia is coming back, not only out of strict financial needs but because it fits into a wider reformist vision.”
That vision is the brainchild of the deputy crown prince, whose ambitions for the country include creating the world’s largest sovereign wealth fund and reducing its dependency on oil revenue. He’s also planning an initial public offering of Saudi Arabian Oil Co., which he said could value the company at more than $2 trillion, and may break up state-owned utility Saudi Electricity Co. into four independent power generating companies.
Unusual Measures
In addition to the loan and bond sales, Saudi Arabia is also looking at less conventional methods to help absorb the shock of lower oil prices.
The country is considering IOUs to pay outstanding bills with contractors and conserve cash, people briefed on the discussions said last month. As payment from the state, contractors would receive bond-like instruments which they could hold until maturity or sell on to banks. Companies have received some payments in cash and the rest could come in the “I-owe-you” notes, the people said.
The kingdom has delayed payments to government contractors working on infrastructure projects for six months or more as the government seeks to preserve cash, people aware of the matter said in October. Delays increased last year and the government has also been seeking to cut prices on contracts, the people said.