Why Saudi Arabia sells 20bn riyal sovereign bonds?

Saudi Arabia sold 20bn riyals ($5.33bn) of debt yesterday and said it would issue further sovereign bonds, as it tries to close a budget deficit caused by the collapse in oil prices.

The final pricing for the five-year tranche was 1.92% the state news agency quoted the finance ministry as saying. The seven-year portion of the issue has been priced at 2.34% with the 10-year debt set at 2.65%, confirming an earlier Reuters report.

The bond sale was open to commercial banks for the first time since the sovereign returned to the capital markets. The first tranche of debt was placed exclusively with state-controlled financial institutions when it was sold last month.

The issue is only the kingdom’s second such issue since 2007. Further bond sales are planned by the Saudi authorities, although their sizes are yet to be determined, the Saudi Press Agency report added. The International Monetary Fund estimates the budget deficit will amount to around $150bn in 2015.

The market has been expecting further issuance given the size of the projected shortfall, with analysts predicting between 100 and 200bn riyals of bonds to be sold in 2015. The lack of public clarity from the government though over the size and timeframe of its debt plans has raised concerns about whether the Saudi banking system has enough liquidity to absorb all the new government bonds.

One-year dollar/riyal forwards hit their highest level since December 2008 yesterday, climbing as high as 144 points. Previously this year, they had been trading almost entirely in a range of zero to 100 points. Traders attributed the move to a jump in longer-term Saudi riyal money rates stemming from the latest bond sale, which pushed the cost of two-year riyal funds in the interbank market up to 1.53% this week from as low as 1.05% six weeks ago.

Concern about Saudi Arabia’s ability to repay its debt does not appear to have increased. Five-year Saudi credit default swaps, used to insure against any sovereign default, have risen only marginally in the last few weeks and are well below their levels in 2011 and 2012.