Saudi Arabian Debt Issue Eases Fears About Kingdom’s Budget Issues

Saudi Arabian debt is becoming cheaper to insure as the kingdom’s massive $17.5 billion bond issue turns one day old, according to a new report by Reuters.

The drop in insurance costs signals easing investor concerns about the effects of the ongoing oil price crisis on the KSA’s financial viability.

Analysts had been concerned that Saudi monetary authorities would abandon the riyal’s peg to the dollar as the national deficit grows in size and becomes a potential recession trigger.

However, the success of the kingdom’s first-ever international bond sale on Wednesday has caused speculators to abandon their previous fears, according to a banker who spoke to Reuters.

"A lot of the hedge funds made speculative bets on the Saudis because of the well-known issues they had – like the depeg story, where everyone thought the Saudis would have to depeg," a debt trader in the United Kingdom said. "Obviously that has kind of unwound now because the bond has been such a success."

Saudi Arabia is the de-facto leader of the Organization of Petroleum Exporting Countries (OPEC), which controls close to 40 percent of the world’s oil exports. The bloc has been unable to agree on a deal to freeze oil output several times this year, despite the strong economic pressures the global supply glut has put on many OPEC member countries.

At the end of next month, OPEC will meet at its headquarters in Vienna to once again negotiate the terms of production freeze, but Iran, Libya and Nigeria will reportedly be exempt from the deal’s limits due to their geopolitical situations.

The success of this week’s bond sale makes it less likely that Saudi Arabia will voluntarily forfeit its ability to compete with Iran for market share.

By Zainab Calcuttawala for Oilprice.com

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