Saudi Arabia leads international bond issuance

September 5, 2024, 10:50 AM

Saudi bond issuance on the international market has been worth almost $27 billion in the year so far, well ahead of Poland in second place

Saudi bond issuance worth $27bn
Helping to finance Vision 2030
Further issuances expected

Saudi Arabia is the leading emerging market issuer of sovereign and quasi-sovereign international bonds, and experts predict the kingdom will expand its borrowings further to help fund infrastructure spending.

Saudi Arabia, the Middle East’s largest economy despite a 0.8 percent decline in real GDP last year, sold $26.8 billion of international bonds from January 1 to August 27 2024, inclusive.

Poland was second among emerging markets with $18 billion and the UAE was third with $12 billion, data from London Stock Exchange Group shows. The data refers to “international” bonds, or those sold to foreign investors.

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When bonds sold domestically are included, China is the world’s largest issuer with $846.4 billion in the year to August 27 and $1.5 trillion in 2023. Saudi Arabia is second this year and last according to this metric.

The Saudi sovereign wealth fund, the Public Investment Fund, this week raised a further $2 billion in debt. This consisted of $1.5 billion in sukuk and $500 million in green bonds.

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in activities not allowed under Islamic law.

Saudi Arabia was also the leading emerging market issuer of international sovereign debt in 2023, selling $26.5 billion of bonds. Its debt raising this year has already topped last year’s total.

It has increased “the pace” of its borrowing partly “to finance the ambitious projects” related to its Vision 2030 economic diversification and development plan, says Lucille Jones, an analyst at London Stock Exchange Group.

She highlights Saudi Arabia’s upcoming staging of the Asian Winter Games in 2029, Expo 2030 and its likely hosting of the men’s football World Cup in 2034.

“Significant funding will be required to meet these fixed deadlines and so I would expect that Saudi Arabia will continue to tap the bond markets to raise capital,” Jones says.

According to Manuel Almutawa, senior portfolio manager at Bahrain's Sico Bank, debt will play a greater role in funding Saudi Arabia’s infrastructure spending “unless we see higher foreign direct investment or rising oil prices”.

“We anticipate more local issuances and cross-currency offerings,” he says.

The kingdom sold a relatively paltry $7.9 billion of international bonds in 2022 and $4 billion in 2021 before increasing its borrowings from the start of 2022 despite soaring interest rates.

US benchmark interest rates surged to a 23-year peak of around 5.3 percent currently from near-zero in February 2022.

“Higher interest rates have resulted in increased borrowing costs for Saudi Arabia,” says Almutawa.

“However, it's important to remember that Saudi has been issuing international bonds since 2016 and previously benefited from much lower rates.

"While US Fed rates remain high, Saudi has enjoyed tighter spreads, currently trading near their lowest levels ever.”

The US Federal Reserve has been slower to reduce rates than markets expected, although August comments by chairman Jerome Powell indicate cuts are imminent.

“While international pension funds and large asset managers typically drive the majority of orders, the conclusion of the interest rate hiking cycle may entice more investors back into fixed income,” says Almutawa.

“High-quality emerging market names like Saudi Arabia are expected to benefit from this shift.”