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Q. Sale of sovereign bonds by Saudi Arabia: Comment on sale of $ 17.5 billion worth of sovereign bonds by Saudi Arabia.
Oct 25, 2016 Related to : GS Paper 3 and 2.

Ans :

Introduction-

Recently Saudi Arabia has sold $ 17.5 billion worth of sovereign bonds, which is an exceptional affair for emerging market. The sale is part of a series of measures that Saudi Arabia is undertaking to extricate itself from a sticky situation, a deeply entrenched structural dependence on oil in a world of persistently low oil prices.

Present Scenario-

  • The oil price was over $110 for a barrel in 2011, but which fallen well below 30$ in the beginning of 2016.
  • It had made huge impact on the economic situation of Saudi Arabia, most of whose revenues come from oil.
  • In 2015, Saudi Arabia has faced huge budget deficit of 98$ billion, i.e 16% of its GDP.
  • According to IMF, Saudi Arabia is expected to grow at rates less than half of last years.

Analysis-

  • Saudi Arabia’s pump at will policy is the main reason behind its current position. Pump at will policy, one designed to keep U.S. shale oil in check but that ended up hurting its own economy by pushing down oil prices. Currently it has moved out of this disastrous policy.
  • In upcoming months, Saudi Arabia is likely to accept output cuts.
  • Consequently, at next month’s OPEC meeting It has also decreased government spending, cut public wages and bonuses etc.
  • Currently it is planning an IPO of Saudi Aramco, the state oil producer, as part of Deputy Crown Prince Mohammed bin Salman’s ‘Vision 2030’ reform plan.
  • For now, the bond sale will help close its budget gap and take pressure off it’s approximately $550 billion foreign exchange reserves.

Sovereign bond sale-

  • The recent sales of sovereign bonds are considered as huge success. Oversubscribed bonds with orders totalling $67 billion, is due to three main factors.
  • First, despite the high price of the bonds and the long-term economic and geopolitical risks associated with Saudi Arabia, the yields looked attractive in the context of low interest rates in developed economies.
  • Second, oil prices have increased since the beginning of the year and are in the region of $50 a barrel.
  • Lastly, the kingdom’s salesmen are reported to have made a solid pitch on the bond road-show, addressing investors’ concerns over the undiversified economy and reiterating Saudi Arabia’s commitment to peg the riyal to the dollar.

Conclusion-

Currently Saudi Arabia is facing huge economic crisis due to sharp fall in the prices of oil and facing huge budget deficit. To address this situation, it has initiated various measures and sale of sovereign bonds is one among them. It has raised about 17$ billion by selling these debt instruments. This aspect has reflected Saudi Arabia as attractive destination.


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