Saudi Arabia’s Journey to Sustainable Sovereign Debt

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World public debt exploded in the course of the pandemic. The unprecedented rounds of fiscal stimulus — meant to mitigate the affect on development — have raised threat ranges and put many international locations in monetary jeopardy. Creating and rising nations, particularly, are struggling: IMF analysis places their present debt ranges 20 to 25 share factors of GDP greater than pre-2008 and the worldwide monetary disaster. 5 international locations defaulted in 2020, and the danger of additional debt crises looms over economies into 2022.

For any nation that points public debt, the priority just isn’t securing the upcoming funding wants however constructing a sustainable sovereign debt with correct asset and legal responsibility administration. This text explores how the Saudi Arabian Nationwide Debt Administration Heart (NDMC) has, regardless of the pandemic, efficiently pursued a well-structured, sustainable debt technique with strong threat administration.

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NDMC was established in late 2015. It goals to safe the sustainability of Saudi Arabia’s entry to varied debt markets worldwide to fund the nation’s finances deficit with the very best price construction. And it ensures infrastructure tasks get the suitable funding.

Though striving for financial diversification through the Saudi 2030 Imaginative and prescient framework, the dominion nonetheless depends closely on oil and stays weak to cost volatility. The extreme plunge of oil costs in the course of the pandemic posed many challenges. And through 2020, the NDMC swiftly revised its debt plan and added SAR 100 billion ($26.7 billion) in debt on the budgeted SAR 120 billion, reaching a complete public debt issuance of SAR 220 billion.

So, how did it do that sustainably?


Saudi Arabia’s Complete Excellent Direct Debt, Exterior and Home (SAR Billions)

Finish of Yr 2024 2023 2022 2021* ​2020 2019 2018 2017 2016 2015
Debt Excellent 938 938 938 938 ​853.5 678 560 443 317 142
Gross Home Product (GDP) 3,697 3,479 3,615 3,207 2,625​ 2,974 2,949 2,582 2,419 2,454
Ratio of Public Debt to GDP 25.4% 26.9% 25.9% 29.2% 32.5% 22.8% 19.0% 17.2% 13.1% 5.8%
Supply: Saudi Arabian Nationwide Debt Administration Heart (NDMC) and Ministry of Finance (MoF).
* As per the newest GDP quantity within the MoF Funds Assertion

Diversifying the Investor Base

When NDMC started issuing debt, the main focus was totally on SAR borrowing and to a lesser extent, US dollar-based borrowing. These issuances noticed common over-subscriptions. NDMC then tapped the euro market and accessed a broader investor base through its €3 billion issuances in 2019 and €1.5 billion in 2021. The newest was the largest ever negative-yield euro issuance outdoors the eurozone, because it issued the three-year debt at minus 0.057% yield. That meant Saudi Arabia was being paid to borrow.

On 30 September 2021, FTSE Russell introduced the inclusion of the native foreign money Sukuk within the FTSE Rising Markets Authorities Bond Index (EMGBI), efficient April 2022. Round a 3rd of the present excellent debt might be included within the index, significantly aiding investor entry, market liquidity, and Saudi debt attractiveness.

One other achievement in 2021 was tapping financing of US $3 billion from Korea Commerce Insurance coverage Company (KSURE). This additionally opens the door for equally enormous preparations sooner or later. Earlier than that, Saudi Arabia secured an Euler Hermes financing settlement in July 2020 (US $258 million).

To facilitate this financing ecosystem, Saudi Arabia has launched its personal export credit score company (ECA), the Saudi Export-Import Financial institution (Saudi Exim). It additionally embraced a inexperienced financing framework, implementing finest practices in a quickly creating and more and more regulated surroundings.

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Sovereign Asset and Legal responsibility Administration (SALM)

In addition to diversifying traders, Saudi Arabia applied greater threat administration requirements and improved the risk-based pricing of its issuances. The Ministry of Finance (MoF) introduced it will construct a unified sovereign asset and legal responsibility administration framework. Importantly, the framework will combine the monetary and non-financial belongings and liabilities.

Among the many advantages of such a framework is its means to estimate net-risk publicity. This may place the NDMC to grasp the probabilities of pure hedging higher and drive extra correct and knowledgeable selections. Apart from bettering debt sustainability, the framework will assist traders analyze the investments and credit standing companies attain the suitable credit standing.

Addressing Curiosity Fee Threat

NDMC pays shut consideration to rate of interest threat, notably price visibility. The year-end 2021 numbers reveal that 82.6% of the general debt price is predicated on mounted rates of interest, whereas solely 17.4% is floating (i.e., variable). On common, the floating-rate debt has a a lot decrease maturity than the fixed-debt publicity.

Over 50% of the debt was issued in a comparatively low-interest-rate surroundings, capturing favorable pricing ranges. We’re at present seeing upward steepness within the rate of interest implied ahead curve throughout all durations, which affords NDMC a positive debt valuation. For instance, the length of the general portfolio (once more as of year-end 2021) is 9.52 years. Because of this the DV01 metric (the greenback worth change for every foundation level change within the rate of interest yield curve) might be favorable if the rate of interest curve turns steeper. Intuitively, the longer the length of the debt portfolio, the extra delicate it’s to adjustments within the yield curve.

Additionally, the typical length at year-end 2020 stood at round 8.7 years. Extending the typical maturities reduces the liquidity and refinancing dangers, that are typical threat elements for public money owed.

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Managing International Change Threat

As of year-end 2021, round 60% of the SAR 938 billion in debt is SAR-denominated, whereas 40% is non-SAR. The US greenback represents nearly all of the non-SAR publicity (the euro includes nearly 2% of the whole debt).

Whereas the SAR foreign money is pegged to the US greenback, the Saudi Central Financial institution (SAMA) must have adequate FX reserves to defend the peg and combat any potential instability within the trade price. Considerably mitigating such threat, SAMA maintains a stable internet overseas asset of US $447 billion as of November 2021, with overseas money and deposit amounting to US $140 billion.

Upcoming Challenges for Saudi Arabia

By means of NDMC, Saudi Arabia has made appreciable enhancements to its debt profile. It has diversified its traders, working in implementing a unified sovereign asset and legal responsibility administration framework, addressed rate of interest threat, and mitigated overseas trade threat. But key concerns stay.

Aligning Numerous and Related Stakeholders

The SALM challenge requires large effort to coordinate and align targets throughout varied authorities entities. Given NDMC naturally has completely different priorities from different authorities entities, conflicts may come up.

For instance, the central financial institution (SAMA) focuses on macroeconomics and worth stability. In the meantime, debt administration (NDMC) prioritizes cheap debt price and threat construction. So NDMC goals for an extended horizon of debt administration with acceptable threat/reward mechanics, whereas the central financial institution targets shorter-horizon pricing stability.

The actions of those essential entities ultimately affect the general financial coverage and, in the end, public debt sustainability. Coordination will due to this fact be essential to reaching mutually agreed expectations.

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Credit score Ranking Businesses

NDMC and the MoF have gotten extra clear round debt issuances, with common reporting of borrowing plans and related statistics. That is bettering their standing with main credit score companies.

Late final yr, Moody’s and Fitch credit standing companies rated Saudi Arabia A1 and A, respectively, and revised the outlook from “adverse” to “secure”. The studies point out NDMC should keep a detailed grip on debt and credit score company expectations. For instance, Moody’s has estimated that “the dimensions of public debt to GDP within the coming years would fall between 25% and 30%, surpassing its estimations for comparable international locations with the identical credit standing of 35%–40%”.

Credit standing companies usually rationalize the ranking and level to dangers which will have an effect on creditworthiness and solvency, whether or not within the brief or long run. Nonetheless, these numbers and expectations are solely high-level pointers, and falling in need of them is appropriate with good motive, akin to financial development.

Contingent Liabilities

A helicopter view is important to grasp the general debt and non-debt obligations. Having one supplies perception past the obvious debt and into different contingent liabilities. The SALM initiative should tackle this wider side to higher grasp the potential ripple impact when crises strike.

Contemplate stock-flow changes. It’s a metric utilized in calculating the potential realization of the contingent legal responsibility or what I name “shadow debt.” Sometimes, amid crises or in the course of the time main as much as them, the metallization threat of contingent liabilities will increase. An instance of contingent legal responsibility is authorities ensures or future dedicated obligations. Including to the identical metric, it contains the unwanted effects of financial instability, akin to a adverse valuation affect of the belongings or overseas trade. Built-in asset and legal responsibility administration reduces the danger of such occasions or at the least assists in anticipating and proactively figuring out them.

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The place To Subsequent?

The NDMC 2022 Annual Borrowing Plan expects debt to remain at SAR 938 billion until year-end 2024, whereas concentrating on refinancing actions for present maturities of round SAR 43 billion throughout 2022. Saudi Arabia’s development expectations are a wholesome 4.8% for subsequent yr (versus 4.4% globally, as per the January 2022 IMF report), accompanied by an anticipated surplus within the 2022 finances (the primary in eight years). In keeping with the MoF report, Saudi’s public debt to GDP is anticipated to proceed its lower-trending journey from a excessive of 32.5% in 2019 to 25.4% in 2024.

Nonetheless, the surge within the oil costs — a constructive exterior issue outdoors the entire management of Saudi Arabia — has contributed to the anticipated debt reductions and bettering debt sustainability prospects. To insulate itself from worth shocks, I can see Saudi Arabia fiercely working to stabilize its deficit fluctuations through elements that it might probably management higher and stimulate extra development alternatives.

One in all these initiatives is the Saudi sovereign wealth fund, the Public Funding Fund (PIF). It goals to handle round US $1.1 trillion of belongings by 2025 and be one of many main sovereign wealth funds globally. One other promising nationwide program is the mining funding within the nation. With US $1.3 trillion of untapped minerals in Saudi Arabia the aim is to scale the sector’s contributions to the GDP from US $17 billion to US $64 billion by 2030.

General, it seems Saudi’s public debt is progressing nicely in the direction of sustainability. NDMC’s problem is to make use of the present financial situations and the exterior constructive elements to cement its place and speed up its bold plans.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.

Picture credit score: ©Getty Photographs/Ayman Aljammaz


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Muadh Alhusaini, CFA, FRM, CAIA

Muadh Alhusaini, CFA, FRM, CAIA, is a co-founder and managing accomplice at Ehata Monetary, a specialised impartial advisory home centered on market threat administration and hedging. Earlier than pursuing the advisory profession, Alhusaini spent practically 10 years as a senior banker within the international markets and financing options with native and worldwide banks. In his present function, he demonstrated the flexibility to mobilize strong, progressive monetary risk-management options to top-tier companies, sovereign entities, personal fairness corporations, and publicly listed firms throughout the Saudi market. Alhusaini is expert in designing and delivering growth applications, seminars, and printed columns centered on monetary threat administration, funding, and governance developments. He holds quite a few board and committee memberships with main establishments in Saudi Arabia. He’s a CFA charterholder and holds the Monetary Threat Supervisor (FRM) certification and is a Licensed Different Funding Analyst (CAIA).

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