Azernews.Az

By Bloomberg

Saudi Arabia, the country with the world’s lowest debt-to-GDP ratio, is evaluating the sale of local currency bonds to bridge a budget deficit after oil prices slumped, according to three people with knowledge of the plan.

The sale of securities in Saudi riyals will be carried out through an auction process by the kingdom’s Ministry of Finance this year or early in 2016, said the people, asking not to be identified because the information hasn’t been made public. The sales are expected to be in small tranches, they said.

The International Monetary Fund estimates the budget deficit of the world’s biggest oil exporter will widen to about 20 percent of economic output this year after King Salman ordered a two-month bonus for public sector workers and pensioners. Brent crude has dropped 46 percent over the past year and traded at $59.77 a barrel on Monday. Oil export income accounts for about 90 percent of Saudi government revenue.

Issuing local currency debt “is perhaps the easiest and cheaper option for Saudi Arabia at this stage,” Apostolos Bantis, a credit analyst at Commerzbank AG, said by phone from London on Monday. “The local banks are very liquid to absorb this kind of debt and even more in the future if needed.”

Saudi Arabia’s banks have lent about 86 riyals for every 100 riyals of deposits they hold, according to data from the Saudi central bank. That compares with 99 dirhams for every 100 dirhams in the United Arab Emirates.

A spokesman for the Ministry of Finance didn’t respond to phone calls, an e-mail and a fax seeking comment. Officials haven’t announced plans to tap the bond market.

Budget Deficit

While the biggest Arab economy hasn’t sold securities with a maturity of more than 12 months for eight years, the government’s General Authority of Civil Aviation raised 15.2 billion riyals ($4.1 billion) from 10-year Islamic bonds in 2013 at a profit rate of 3.21 percent. In the past, Saudi Arabia used the windfall from crude exports to slash its debt to gross- domestic-product ratio to less than 2 percent.

The country in December forecast the budget deficit to widen to 145 billion riyals this year from a projected 54 billion riyals last year. The 2015 budget probably assumed an average oil price of $80 a barrel, down from $103 a barrel in the previous year, John Sfakianakis, a former chief economic adviser to the Ministry of Finance, said in December.

For now, the government is financing its budget shortfall by drawing down its deposits at the central bank, accelerating the decline in currency reserves. Net foreign assets dropped more than $6 billion in May, taking their four-month decline to more than $54 billion -- about 8 percent of the total.

Saudi Arabia is pressing ahead with an investment program to boost non-oil GDP growth, and military spending is likely to rise as the kingdom leads air strikes against Shiite rebels in Yemen.