Saudi Arabia turns to Euro-bond amid near record-low yields

Saudi Arabia is tapping international bond markets for the second straight month, marketing euro-denominated debt to take advantage of ultra-low borrowing costs and help reduce its reliance on dollar debt.

The world’s largest crude exporter is planning a two-part, benchmark-sized deal with a three-year and nine-year offering, according to a person familiar with the matter, who asked not to be identified because they’re not authorised to speak publicly. Saudi Arabia raised $5bn from a two-part dollar-bond offering in January.

The kingdom has picked BNP Paribas, Goldman Sachs Group Inc. and HSBC Holdings as global coordinators, and Citigroup, JPMorgan Chase & Co, Standard Chartered and Samba Capital as passive joint bookrunners to organise a global investor call on Tuesday.

A potential sale comes at a time when the recovery in Brent crude prices has eased fiscal pressures in the region. The oil price is still well below what most of the Gulf economies need to balance their budgets.

“The yields will probably be particularly low, sub 1 per cent, and it makes sense for them to try and diversify their funding a little,” said Richard Briggs, a money manager at GAM Holdings in London. “Things have been marginally weaker in emerging-market credit over the last few days, but the timing isn’t shocking, and the big surge we’ve seen in oil prices should add further support to the credit.”

The kingdom is tapping euro-denominated bonds only for the second time since July 2019, when it sold EUR3bn ($3.4bn) of 2027 and 2039 securities, after attracting over EUR14.5bn in demand. Yields on the 2027 notes climbed two basis points on Tuesday to 0.24 per cent, the highest since January 12.

Low Costs
Borrowers are clamoring for euro bonds because of the relatively low costs and a hefty base of buyers in Europe looking for returns outside their region. While global central banks remain accommodative and are unlikely to raise rates before 2023, markets are signaling inflation is finally coming to the developed world.

The average yield on euro-denominated debt in emerging markets reached a record low of 1.18 per cent on February 11. The rate, based on a Bloomberg Barclays gauge for the asset class, is now at 1.24 per cent, about 2.4 percentage points lower than the yield on dollar bonds.

Meanwhile, the euro has weakened versus the dollar this year with the region slow to roll out its vaccine program, weighing on prospects for a recovery relative to its peers. That’s helped to make it attractive as an emerging-market funding currency, something that would add to the allure of a euro-denominated bond sale.

Saudi Arabia expects public debt to increase to SR937bn ($250bn) by the end of 2021, reaching more than 30 per cent of economic output, according to government forecasts. The government said in its annual borrowing plan it intends to secure most of the external debt needed to fund this year’s deficit by June.

The kingdom aims to almost eliminate the budget shortfall by 2023 as part of its pledge to keep debt under control. Still, government borrowing may shift to other entities, most likely the Public Investment Fund, as it embarks on a plan to invest $40bn a year in the domestic economy.