Saudi's first global bonds worth record $17.5bn: State media

Saudi Arabia's first international bond offering totalled $17.5bn and was almost four times oversubscribed, official media said early on Thursday, confirming the strong buyer interest that analysts expected.

"The total sum of the first offering was $17.5bn," the Saudi Press Agency reported. "The total subscription requests for these bonds amounted to $67bn."

A person involved in the operation on Wednesday confirmed that "the terms have been launched," and Saudi has divided the total into three tranches with maturities of five, 10 and 30 years, respectively, tailor-made for the American market.

However, investor interest in the issue extends well beyond the US, the person said, and the issue was bigger than many analysts expected. Bloomberg News said it will be the biggest ever from an emerging-market nation.

Saudi Arabia, the world's largest oil exporter, projects a budget deficit of $87bn this year, reflecting a fall in oil revenue, which accounts for most of its income.

To cover the shortfall, Saudi Arabia is re-orienting its economy by imposing unprecedented subsidy cuts and slowing government projects. In September, it cut cabinet ministers' salaries, among other measures.

The kingdom last week began meetings with potential investors ahead of the bond issue.

According to sources cited by Bloomberg News, it is pricing the five-year bonds to yield about 140 basis points over US Treasuries.

Christopher Dembik, global head of macroeconomic research at France's Saxo Bank, told AFP on Wednesday that the offer "is going to arouse strong interest on the part of investors" who are desperately looking for yield.

The Saudi offer "will be certainly slightly above that of its neighbours because of its less favourable sovereign debt rating and a recent global trend towards higher sovereign rates," he said.

Saudi Arabia has already issued domestic bonds, but that has led to a tightening of bank liquidity, according to Patrick Dennis, lead Middle East economist at Oxford Economics in London.

"So that's the main reason why they're now borrowing overseas," he told AFP.

Saudi banks' loan-to-deposit ratio rose for the fifth consecutive month in August, reaching 90.8 percent, because of faster growth in credit relative to deposits, Riyadh's Jadwa Investment said in a report this month.

Borrowing abroad also reduces the drain on the kingdom's foreign reserves, Dennis said.

Official data show those reserves declined to $562bn in August from $732bn at the end of 2014.

The reserves remain very large, but their rapid drawdown shows a need for diversified funding, Dennis said.

London-based Capital Economics said in a briefing paper that Saudi reserves are now "unlikely to fall much beyond their current level in the coming years" because the bond issue will finance about a third of next year's budget deficit and almost all of the current account shortfall.

In April, the kingdom released its wide-ranging Vision 2030 for diversifying the economy.

At its heart is a plan to float less than five percent of state oil company Saudi Aramco on the stock market.

The proceeds would help form what will become the world's biggest state investment fund, with some $2 trillion in assets.

With prospects good for the current international bond issue, Dembik foresees Saudi Arabia borrowing $15bn to $20bn annually in the market to help finance its economic transformation plan.