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The cost of insuring Saudi debt more than doubled in the last 12 months

Investors looking for security on Saudi Arabia’s debt are looking at rates similar to what they would pay for Portugal, which carries a junk credit-rating, seven levels below Saudi Arabia’s Aa3 investment grade at Moody’s Investors Service.

The cost of insuring the kingdom’s debt more than doubled in the past 12 months to a 190 basis points, or $190,000 annually to insure $10 million of the country’s debt for five years, reports Bloomberg. The cost is the highest since April 2009.

Bloomberg Saudi and Portugal CDs

Continued low oil prices, along with financing a war in Yemen, resulted in a record 15% budget deficit, about $98 billion, for the kingdom in 2015. Saudi Arabia has trimmed its budget for this year by about 14% to $225 billion, and started to cut social programs in order to reduce the deficit for the coming year.

Yield on proxy debt increases 49 basis points

Because the Saudi government does not have any outstanding international bonds, the bonds of state-controlled Saudi Electricity Co. are used as a proxy for the government. The yield on the company’s $1.5 billion securities due April 2024 rose 49 basis points since the start of the year to a record 4.6% at the start of the week.

Investors looking for increasing levels of insurance

The volume of Saudi debt being insured has also increased, with outstanding contracts covering $636 million at the start of the year. That’s less than half the bonds insured by the U.A.E., but still a substantial amount for a country whose debt-to-GDP rose to nearly 7% from 2% last year, reports Bloomberg.

The cost of insuring Saudi debt could continue rise too, with the conflict in Yemen expected to continue, low oil prices likely to persist, and increasing tensions between Saudi Arabia and Iran, causing more concern. Barclays Plc sees five-year default swaps rising a further 50 to 100 basis points as the outlook for Saudi Arabia’s finances remain uncertain.

Low oil prices and political uncertainty may lead to the first dollar-denominated bonds, however, said Sergey Dergachev, a senior money manager at Union Investment Privatfonds GmbH in Frankfurt. “Current levels of let’s say 4% for a 10-year bond are attractive, for both issuer and investors,” he said.


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