Bankers should be punching the air. Saudi Arabia is close to agreeing terms on a $10 billion loan with a syndicate of banks including JPMorgan, HSBC and Bank of Tokyo-Mitsubishi. Normally, getting the nod to lend to the Middle East’s largest holder of crude oil reserves for the first time in 25 years would be easy money. But banks may be ignoring the risks.
Despite running up a 15 percent budget deficit last year, which is expected to grow further in 2016, the Saudi government has found it easy to borrow money. It is likely to borrow at 120 basis points over Libor, a rate far below the risk implied by its credit-default swaps, according to a Reuters report on April 20. The terms may be in line with recent debt deals secured by neighbors Qatar and Oman, but the risks associated with the kingdom could be much bigger.
Pushed on by its energetic but inexperienced Deputy Crown Prince Mohammed bin Salman, the kingdom is fighting on four fronts. The thirty-something prince wants to win a global oil price war which is stretching the kingdom’s finances to breaking point, while opposing Iran in proxy conflicts in Syria and Yemen.
At the same time, he aims to restructure the kingdom’s inefficient economy by cutting state subsidies and selling government assets, simultaneously suppressing internal dissent. Although Mohammed bin Salman’s Al-Saud dynasty is secure, these problems could pose a threat to its future. Moody’s has placed Saudi’s Aa3 issuer rating on downgrade review as the challenges facing the kingdom stack up.
There are external risks too, not least its changing relationship with the United States, which appears uninterested, despite President Barack Obama’s recent visit, in guaranteeing Riyadh’s security in the region.
Sovereign defaults are rare in the region, but not inconceivable. Iran renounced its $15 billion of foreign borrowing racked up by the Shah’s regime after the revolution in 1979, which led to the seizure of its assets in the United States. Bankers dismiss the possibility that the same nightmare scenario could one day unfold in Riyadh. They do so at their peril.