NEWS

By Matthew Martin

April 20, 2016 — 6:07 AM BST Updated on April 20, 2016 — 2:09 PM BST

Saudi Arabia sealed its first loan in at least 15 years as it seeks to fill a budget hole estimated at about $100 billion this year, three people with knowledge of the matter said.

The government will pay lenders about 120 basis points above the London interbank offered rate, including margin and fees, for the $10 billion facility, the people said, asking not to be identified as the information is private. The loan will have a tenor of five years and should be signed before the end of April, the people said. Qatar raised a $5.5 billion five-year loan priced at 90 basis points above Libor in December.

Saudi Arabia has not borrowed internationally since at least 1999, according to data compiled by Bloomberg. The country is looking for other sources of funding to plug a budget shortfall that is expected to reach almost 18 percent of economic output this year, according to Riyadh-based Jadwa Investment Co. The kingdom will prepare for a bond sale and start a two- or three-year program once it concludes the loan deal, Minister of State Mohammad bin Abdulmalik Al-Sheikh said last month.

“This loan was a good way of testing the water before a sovereign bond issue,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, said by phone on Wednesday. “The recent improvement in the oil price and strong demand from investors means that they may be able to issue a larger bond than would have been the case at the end of last year.”

The Finance Ministry declined to comment.

Credit Downgrade

The kingdom’s rating was lowered one level to AA-, the fourth-highest investment grade, by Fitch Ratings earlier this month. Standard & Poor’s and Moody’s had already cut Saudi Arabia’s rating this year as a result of the drop in oil prices, the country’s main source of revenue.

A large group of U.S., European, Japanese and Chinese banks are lending the funds, the people said. Saudi Arabia’s initial request for as much as $8 billion was significantly oversubscribed, allowing the country to increase the size of the deal, the people said. Verus Partners, a boutique advisory firm set up by former Citigroup Inc. bankers Mark Aplin and Andrew Elliott, is advising the Saudi government, the people said. At $10 billion the loan is the largest to be raised in the Middle East since Saudi Aramco, the world’s largest oil producer, obtained a $10 billion financing facility in March last year.

So far the government has funded its deficit by drawing down its savings and tapping local banks. International debt issuance and bank borrowing will be important to reduce the drain on foreign reserves and tightening liquidity conditions among local lenders, said Malik. Foreign reserves held by the central bank have dropped more than $100 billion and the domestic bond program has pushed up interbank rates to their highest level since January 2009.

“The kingdom needs to diversify its sources of funding and find alternatives to simply local debt issuance and tapping foreign reserves as part of a fiscally prudent policy decision,” John Sfakianakis, director of economics research at the Gulf Research Centre, said by phone.

Bloomberg | April 20, 2016