Saudi Arabia: Open For Business

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New year, new opportunities for debt capital markets.

One of the most exciting developments in 2017 was the surge of issuance activity in the Middle East. It’s clear this part of the world can no longer rely on oil revenues and thus, diversification is the name of the game.

The biggest of the sleeping giants is Saudi Arabia, whose announcement of its budget for 2018 excited local and international banks who are eyeing opportunities in the region. In 2017, Saudi Arabia suffered a recession, with its economy contracting by around 0.5% thanks to depressed oil prices. The 2018 budget is intended to make dependency on oil a thing of the past.

More news of hard progress was announced at the end of last year with American tech giants, Apple and Amazon, announcing plans to invest significant sums in the region and validating the Saudi’s drive to attract global companies and bolster private enterprise.

This shift towards technology is a cornerstone of the 32-year old crown prince, Mohammed bin Salman’s Saudi Vision 2030, which encourages foreign investment. With two-thirds of the Saudi population aged under 30, these plans, supported by this latest budget and by social reform, have been resoundingly popular in the Kingdom.

So, what’s new? The key takeaway from December’s budget announcement is that the Kingdom is trying to migrate to a budget that has less than 50% of its revenues generated by oil – an ambitious target, to say the least.

As discussed on our blog last year, it’s encouraging to see the Kingdom’s new, progressive leadership planning for the future. The headline-gathering IPO plans of Saudi Aramco was the first sign Saudi was welcoming change, and exchanges and banks all over the world have queued up to fight for their piece of the profit. This news is a boon for fixed income markets, too. In order to finance its growing deficit, Saudi Arabia is going to have to borrow, and borrow in large volumes.

This, of course, has already begun. Last year, Saudi raised around $10 billion from domestic markets and $21 billion from overseas. Earlier this week, Bank of America Merrill Lynch issued a report which advised investors to “expect a busy period of Gulf Cooperation Council issuance,” and that it foresees “very large issuance” in 2018 from Saudi Arabia, totalling around $20 billion. Down on 2017’s total, but still a massive increase on historic figures, and a level of activity that will set pulses racing in international fixed income markets.

A lot of this activity will be handled by local banks, but international banks will get in on the action, as it’s clear that the Saudi finance ministry is open to overseas advice and business. Banks are queuing up to try to claim their piece of the action as Saudi opens its doors. Even activity handled by the local banks will feed into international markets as domestic banks borrow to support balance sheets.

At Origin, we’re doing our bit to prepare for increased activity, too. We’re already working with two issuers in the region and we’re looking to get others signed up as we move through 2018. It’s fair to say that the prize for converting business in this part of the world will be worth it for exchanges, banks and technology companies.

Change is coming to Saudi Arabia and this time its intended reform seems like more than just hot air. This time they mean business.

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This article was created in association with Origin Markets, directly connecting dealers and issuers in the primary marketplace for the first time. 

Edward Playfair