Published On: Wed, Oct 17th, 2018

Fate of journalist heightens Saudi debt worries

DUBAI—Investors are growing more concerned about Saudi Arabia’s unprecedented binge on debt in recent months, as the kingdom grapples with an international crisis over allegations that it killed a prominent Saudi journalist.

In the two years since May 2016, Saudi Arabia has raised $ 68 billion in dollar-denominated bonds and syndicated loans—up from zero. That is one of the fastest rates that any emerging economy has accumulated debt, according to data from Fitch Ratings.

The cost of insuring against Saudi default has increased roughly 30% since the disappearance of Jamal Khashoggi, a dissident and former royal insider whom Turkish authorities now allege was killed on Riyadh’s orders at the Saudi consulate in Istanbul. While Saudi Arabia is considered still relatively safe compared with other emerging markets, the rise in its insurance rates shows that investors are beginning to worry about Crown Prince Mohammed bin Salman’s disruptive diplomatic and political moves.

The fallout over the suspected killing of Mr. Khashoggi is the latest for Saudi Arabia, as it seeks to attract foreign investment and diversify its oil-dependent economy.

A host of Western executives and business advisers have dropped out of Riyadh’s premier business conference next week. Business deals have stalled, including a high-profile space-exploration partnership with Richard Branson. Even before the Khashoggi allegations, foreign-direct investment had fallen to historically low levels.

Investors had seen Saudi bonds and loans as relatively safe bets among emerging markets, with Riyadh’s enormous oil reserves, close alliance with the U.S., and an ambitious fiscal and economic reform plan.

Saudi Arabia has repeatedly denied responsibility for the writer’s disappearance. But the allegations have strained relations between Riyadh and the U.S. and raised the specter of international sanctions on the kingdom.

“The latest developments obviously increase the risk for investors,” said Parth Kikani, director of fixed income at Dubai-based Emirates NBD Asset Management. “However we expect these issues to be resolved and for the focus to shift back to fundamentals.”

The concerns highlight Saudi Arabia’s breakneck accumulation of debt. The pace is rivaled only by Argentina’s $ 69 billion splurge from the end of 2014 to June this year, leading to its current debt crisis.

Separately, Saudi Arabia’s sovereign-wealth fund, the Public Investment Fund, took out its first-ever bank loan last month, raising $ 11 billion. The national oil company Saudi Aramco plans to raise up to $ 50 billion so it can inject at least that amount into PIF to invest at home and overseas, The Wall Street Journal has reported.

The Saudis are raising the money during a tumultuous period. They are fighting a war in Yemen against separatist rebels; spending record amounts to diversify the economy; and infusing the sovereign-wealth fund with cash to spur investments abroad.

“In dollar terms, Saudi Arabia’s recent external borrowing has been almost without precedent in the emerging-market universe,” said Krisjanis Krustins, director of sovereign ratings at Fitch.

Mr. Krustins and others say Saudi Arabia has been one of the main beneficiaries of cash flooding into emerging markets in recent years. For now, they say, Saudi Arabia, with its $ 500 billion of foreign exchange reserves, remains a good debt investment, as its ratio of debt-to-economic output is one of the lowest globally.

Yet the sheer pace and size of the borrowing has some analysts and economists questioning whether debt investors are still miscalculating the risk of investing and could be left nursing losses if the Saudi economy falters and its bond prices fall.

If the Turkish allegations prove true, Mr. Khashoggi’s possible death would add to a list of politically disruptive actions linked to Prince Mohammed, the 33-year-old de facto ruler of Saudi Arabia.

He wrested the right to the throne from his cousin last year and later locked up hundreds of wealthy businessmen and members of his own family in a self-described corruption purge. He has cracked down on voices of dissent and waged diplomatic spats with regional neighbors and Western nations.

Some investors, economists and bankers say the market hasn’t yet fully accounted for the risk of an unforeseen geopolitical, economic or oil-price crisis. They also voice concern about poor transparency over debt exposure at the sovereign-wealth fund and state enterprises.

“[Investors] are taking for granted that you have political stability in Saudi Arabia,” said Garbis Iradian, chief economist for the Middle East and North Africa at the Institute of International Finance, a global trade group for banks in Washington. “The risk could be high.”

The Saudi government so far also isn’t concerned about its growing debt pile. Appetite from “international investors, demonstrated by their strong demand for our international issuances, has been very high,” the Saudi ministry of finance said in a statement last week to The Wall Street Journal.

It added that the country has accumulated “significant financial buffers to absorb potential shocks.”

Riyadh also is taking on debt at a time when interest rates are rising and central banks are cutting bond-buying programs. Investors are likely to shift back to developed countries and away from emerging-market debt like Saudi Arabia’s, said Vikram Aggarwal, a fixed-income fund manager at London-based Jupiter Fund Management PLC.

Those potential troubles could arise as the kingdom runs a fiscal deficit to fund a yearslong plan to diversify its oil-dependent economy, dubbed Vision 2030. Spending will outpace revenues by roughly $ 35 billion dollars next year, according to government estimates, meaning it will again have to turn to the debt markets.

“Saudi, which has issued more [debt] than the rest, should take a hit,” Mr. Aggarwal said.

Other debt investors remain calm about the economic risks in Saudi Arabia.

They point to the country’s government debt-to-GDP ratio, which will reach about 20% this year, low compared with peers, according to the Institute of International Finance. Saudi Arabia remains one of the world’s largest oil producers at a time when some analysts forecast prices to hit $ 100 a barrel, although some banks and oil traders are predicting that prices will eventually settle back down into the $ 50 range.

And some of Prince Mohammed’s disruptive changes, from allowing women to drive to opening cinemas, have proved popular with the kingdom’s young population.

Riyadh’s peg to the dollar means the kingdom is less likely to experience the wild swings in the costs of foreign-currency borrowing that floating emerging market currencies, such as those of Argentina and Turkey, are now currently facing, investors say.

“Saudi Arabia and the Gulf region is offering you a pretty decent risk-reward,” said Meno Stroemer, fund manager at Switzerland-based Fisch Asset Management.

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Fate of journalist heightens Saudi debt worries