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Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides

Image: Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides
(Dollar Photo Club)

Tuesday, 12 Jan 2016 07:46 AM

Investors wanting to take out insurance on Saudi Arabia’s debt have to pay as much as they would for Portugal, a nation still saddled with a junk credit-rating five years after an international bailout.

The cost of insuring the kingdom’s debt more than doubled in the past 12 months to 190 basis points on Thursday, the highest since April 2009, according to CMA prices compiled by Bloomberg. That’s six basis points more than contracts linked to debt from Portugal, whose rating is seven levels below Saudi Arabia’s Aa3 investment grade at Moody’s Investors Service. The Arab nation’s credit-default swaps fell eight basis points on Friday.

Saudi Arabia’s finances are under pressure as it fights a war in Yemen at a time when crude prices are languishing at the lowest level in almost 12 years. The country, which counts on energy exports for 70 percent of government revenue, sold bonds for the first time since 2007 last year to help fund a budget deficit that may have been the widest since 1991. Net foreign assets dropped for 10 straight months through November, the longest streak since at least 2006, to $627 billion.

“They have huge reserves and extremely low debt, but the question is, how long are oil prices going to stay at this level?” said Anthony Simond, an investment manager who helps oversee about $10 billion of emerging-market debt at London-based Aberdeen Asset Management.

Brent crude, a pricing benchmark for more than half the world’s oil, sank below $35 a barrel last week. It fell a further 5 percent to $31.86 a barrel as of 4:49 p.m. in London on Monday, the lowest level since April 2004.

Proxy Debt

The bonds of state-controlled Saudi Electricity Co., used as a proxy for the government in the absence of any international sovereign debt, have tumbled as oil has retreated. The yield on the company’s $1.5 billion securities due April 2024 jumped 40 basis points last week to a record 4.52 percent. The extra premium investors demand to buy the debt over U.S. Treasuries of similar maturity widened to an all-time high.

“Rising spreads may have an impact on whether or not they come to the market,” Simond said.

Saudi Arabia last month announced spending and subsidy cuts, reflecting scaled-back revenue expectations. The nation’s budget envisions cutting expenditure to 840 billion riyals ($224 billion) this year after it reached 975 billion riyals in 2015, 13 percent above target. The kingdom has assets that it hasn’t utilized yet, and non-oil revenue may reach $100 billion over the next five years, Deputy Crown Prince Mohammad bin Salman said in an interview with The Economist last week.

Traders are insuring more Saudi debt than ever, with outstanding contracts covering an unprecedented $636 million as of Jan. 1, according to Depository Trust & Clearing Corp. data. While that’s less than half the bonds insured from the United Arab Emirates, it’s a leap for a nation whose debt-to-gross domestic product rose to almost 7 percent last year from less than 2 percent in 2014, according to the International Monetary Fund.

With the kingdom’s finances strained and tension escalating between mainly-Sunni Saudi Arabia and Shiite-dominated Iran, Barclays Plc sees five-year default swaps rising a further 50 to 100 basis points, according to an e-mailed report on Wednesday.

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Investors wanting to take out insurance on Saudi Arabia's debt have to pay as much as they would for Portugal, a nation still saddled with a junk credit-rating five years after an international bailout.The cost of insuring the kingdom's debt more than doubled in the past 12...
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2016-46-12
Tuesday, 12 Jan 2016 07:46 AM
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