This news was published by the Reuters news agency as an exclusive report. The report may come as a shock to many. Saudi Arabia considered being the oil baron is today reportedly facing a big time cash crunch. According to reports, this is one of the biggest foreign borrowings by the Saudi kingdom’s government for over a decade. Why in the first place this type of situation arisen over one of the major oil rich countries in the world? Read the complete report here.
According to Reuters, Riyadh has asked lenders to submit proposals to extend a five-year loan of 6-8 billion US dollars with an option to increase it. This step is taken by oil Mughals to help plug a record budget deficit caused by low oil prices. The sources declined to be named because the matter is not public. Calls to the Saudi finance ministry and central bank seeking comment on Wednesday were not answered.
According to sources, this new development took place last week when Saudi Arabia reportedly asked banks to work out on the idea of granting of an international loan, but the actual size of the loan amount and lifespan were not specified. The sources further claimed that the Kingdom’s budget deficit had reached to nearly $100 billion last year. The Saudi government is currently in the process of bridging the gap of the financial deficit by drawing down the massive store of foreign assets and issuing domestic bonds. But the assets will only last a few more years at their current rate of decline while the bond issues have started to strain liquidity in the banking system.
The sources have also revealed that the London-based boutique advisory firm Verus Partners, set up by former Citigroup bankers Mark Aplin and Andrew Elliot, is advising the Saudi government on the loan. The firm has already started calling for the proposals from a small group of banks on the behalf of Saudi Ministry of Finance. They added that banks participating in the loan would have a better chance of being chosen to arrange an international bond issue that Saudi Arabia may conduct as soon as this year.
According to sources, the current scenario in the Gulf countries is not good at all. The Analysts have claimed that the six major Gulf oil exporters could end up borrowing around $20 billion or more by the end of 2016. This is considered as the biggest shift compared to past years when the Gulf countries had surplus funds to lend it to the rest of the world. The reports say that all the six states have either launched borrowing programs or planning to do so to handle the prevailing situation of low oil prices. With money becoming scarcer at home, Gulf companies are also expected to borrow more from abroad.
In mid-February, Standard & Poor’s cut Saudi Arabia’s long-term sovereign credit rating by two notches to A-minus. The world’s other two major rating agencies still have much higher assessments of Riyadh, but last week Moody’s Investors Service put Saudi Arabia on review for a possible downgrade. The bankers have a very positive approach towards the Saudi Arabia since the value of Kingdom’s wealth its net foreign assets still total nearly $600 billion while its public debt levels are the lowest amongst the world. According to the bankers, the pricing of the loan is likely to be benchmarked against international loans taken out by the governments of Qatar and Oman in the last few months.
Because of banks’ concern about the Gulf region’s ability to cope with an era of cheap oil, those two loans took considerable time to arrange and the pricing was raised during that period. Oman’s $1 billion loans was ultimately priced at 120 basis points over the London interbank offered rate (Libor), while Qatar’s $5.5 billion loans was priced at 110 bps over, with both concluded in January. “The indications are that a Saudi deal would have to price higher than that, as the world has changed significantly since those deals,” one Middle East-based banker said, referring to the rating agencies’ actions.