IMF: Saudi Arabia may issue government bonds this year

DUBAI: The government may resume issuing bonds this year, easing downward pressure on the country’s foreign reserves caused by low oil prices, a senior International Monetary Fund official said after talks with Saudi officials.

“The sense we had is this year,” Tim Callen, chief of the IMF mission to Saudi Arabia, said of the Kingdom’s potential issuance plans.
He was speaking to Reuters by telephone after annual consultations between the IMF and Riyadh.
Bond issues would be a big shift in Saudi economic policy. Riyadh has been focusing on paying down its obligations; public debt fell to SR44.3 billion ($11.8 billion) at the end of last year, or just 1.6 percent of gross domestic product, finance ministry data show.
However, the plunge in global oil prices since last June has slashed Saudi oil export revenues and Finance Minister Ibrahim Al-Assaf has said bond issues are possible. The government last issued a development bond in 2007.
So far, Riyadh has been covering its budget deficit by drawing down financial reserves. Central government deposits at the central bank — current and reserve deposits, those earmarked for state projects and those of government institutions — totalled the equivalent of $361 billion in April, down from $447 billion last August.
The drawdown has caused net foreign assets at the central bank, which acts as a sovereign wealth fund, to slide to $679 billion in April from a record $737 billion in August.
Given the size of the deficit, this strategy cannot continue indefinitely. The IMF predicts the government will run a fiscal deficit of around 20 percent of GDP this year, equivalent to roughly $150 billion.
Callen said government bond issues would reduce pressure to draw down the reserves, eventually allowing them to stabilize. He predicted the bonds would be riyal-denominated and be absorbed easily by Saudi Arabia’s cash-flushed capital market.
“There will be large demand among banks — there’s a ready market there,” he said.
Callen said pressure on the reserves would also decrease as Saudi Arabia rationalized its state spending, which he said was inflated this year by one-off factors such as bonuses for state employees to mark King Salman’s accession to power in January.
He declined to estimate how fast spending would adjust.
Government bond issues would also benefit the kingdom by building a benchmark yield curve that could be used to develop the corporate debt market and by providing investors with new savings instruments, Callen added.