Saudi Arabia borrows at negative rates for the first time as oil recovers

One of the most oil-dependent countries in the world, Saudi Arabia has regularly taken advantage of international bond markets since 2016 to balance its budget amid crude oil price fluctuations. Its economy contracted by 3.9% last year, as the coronavirus pandemic affected global energy demand, according to International Monetary Fund estimates, leaving it with a budget deficit of 12% of production. economic in December.

The government has unveiled a plan to cut more than half of this deficit by cutting spending this year. His decision to issue in euros is probably part of that, according to analysts.

Since 2014, the euro area has had a negative policy rate, which acts as a benchmark for sovereign and corporate debt, reducing the cost of debt in euros in general. Governments and companies around the world often take advantage of the European bond market to access cheaper funds. China was able to borrow at negative rates for the first time last year in a three-part debt sale denominated in euros.

“It makes sense for them to diversify their funding base and get a significantly lower cost of funds,” said Zeina Rizk, executive director and fixed income portfolio manager at Arqaam Capital in Dubai. The size of Wednesday’s issue is surprisingly small, but the size of the order book showed demand was still there, he said.

Saudi Arabia’s economy is expected to rebound as oil prices recover. HSBC economists expect gross domestic product to rise to 4% by 2021.

World reference crude Brent has risen more than 26% so far this year, bringing the price back to pre-pandemic levels. OPEC members and a group of large producers outside the Russia-led cartel have largely maintained production cuts that were set to reduce supply and support prices, while the pandemic crushed demand for energy. In December, they agreed to a very moderate increase of half a million barrels a day.

In a surprise move, Saudi Arabia said last month that it would further reduce production by a million barrels a day. The adverse winter weather in Texas further reduced the world supply of crude oil, as the pipes and equipment of shale oil fields froze, although in recent days it has recovered in great measure.

“Right now, Saudi controls the price of oil a lot; obviously they’re sitting with a bit of spare capacity, ”said Kieran Curtis, Aberdeen Standard Investments’ emerging market fund manager. He said he expects Saudi Arabia to be able to increase production as the world economy recovers and energy demand increases.

Kingdom advisers told the Wall Street Journal that it is currently being considered and that Saudi Arabia’s production may increase in the coming months.

“They’re coming to this from a position of strength,” said Mohieddine Kronfol, portfolio manager at Franklin Templeton, which focuses on Middle East bonds. “Financially they have dealt with the virus quite well; we begin to see how a recovery is achieved. They have managed to contain the consequences of oil price volatility.

It is overweight Saudi bonds, meaning the fund it manages has more than the benchmark it follows.

However, for some investors, returns are too low to interest them.

“We don’t think these bonds offer much value because of the narrow spreads,” said Joseph Mouawad, Carmignac’s international bond fund manager. But for investors who only invest in euro-denominated bonds, Wednesday’s issuance could make sense, he said.

“You have many mandates and cash that need to be deployed in fixed income instruments. These euros need a home, ”he said. “With most of Europe’s sovereign space in negative territory, safer emerging countries seem increasingly attractive.”

Write to Anna Hirtenstein to [email protected]