Saudi Arabia has pulled off a record-breaking bond sale, with $17.5 billion of US dollar-denominated paper sold on October 19 as part of plans to reduce its oil dependency and create a more diversified path.
With investors increasingly upbeat on EMD, this latest sale marks a new watershed, as the Saudi sale eclipses Argentina’s April bond sale of $16.5 billion, making the sale a record issue for the emerging economy.
But what does this mean for investors who are positioned in Saudi Arabia, MENA and the wider emerging markets?
Citywire A-rated Mohieddine Kronfol, chief investment officer for Global Sukuk and MENA Fixed Income, Franklin Local Asset Management believes the debut transaction went well and will likely be well supported by local investors, as well as supporting Saudi's technical picture.
‘Not only could the bond help develop the Kingdom’s debt markets by introducing a more sophisticated type of investor, but there are also positive ripple effects for Gulf Cooperation Council fixed income.’
‘The deal went well because, despite the challenges facing the Saudi economy from lower oil prices, it still represents one of the stronger credits in emerging markets that offers attractive relative value and important diversification benefits.'
Vote of confidence
‘The Saudi authorities are improving capital market infrastructure and increasingly easing market access for both international bond and equity investors.'
'In addition, the improved backdrop for the oil price, cheap equity valuations and the potential for a turnaround in corporate sector earnings could prove a very strong combination of factors that will see Saudi equities perform strongly over 2017.’
Meanwhile, Neuberger Berman’s co-head of emerging market debt, Rob Drijkoningen, believes the Saudi auction has crossover benefits, as the debt is rated highly in a world starved of attractive, yielding debt.
‘There has been scarcity value around Saudi Arabia, as there has been no US dollar bond issuance before, means there was an attraction. There is also crossover attraction as it is investment grade and investors wouldn’t be worried about moving into higher yielding territory or riskier assets.’
‘We participated and it is not a particularly sexy area of the EMD market to invest in, but it is a solid, fundamental investment and adds diversification and yield pick-up for the fund. Even with the oil price falling, moves like this show they are working out ways to put the economy on a stable footing and that is encouraging.’
Positioning for risk
However, Rubric’s Daniel Moreno, who runs the Rubrics Emerging Markets Fixed Income fund said he didn’t participate in the auction as he believes the bonds did not adequately compensate for the risk being taken.
‘A spread ranging from 135 to 210bps doesn’t reflect the fact that fundamentals have deteriorated markedly with the collapse of oil prices and the difficulty to reduce their dependency on revenues from energy.’
‘Saudi’s current account deficit has gone from +20% of GDP to -8% and the budget deficit has reached a staggering -15% of GDP. Saudi’s hard currency reserves stand at around 570bn USD, down from over 700bn USD, but with a fiscal break-even oil price at 79 USD, the macro will deteriorate further before it gets better.’
Charlemagne Capital's Akhilesh Baveja, who is Citywire AAA-rated, believes the world should expect to see further issuances by Saudi in the near to medium.
'The willingness of the government to take tough decisions shows its serious intent to bridge the public deficit.'
'Forex reserves are still at respectable levels, this gives comfort to the bond holders that the SAR/USD peg is defendable and sustainable in the short to medium term.'