Saudi Arabia sets record with $ 17.5 billion bond issue

Low global interest rates, lack of high- yield assets boost unexpected demand

Saudi Arabia conducted the largest- ever emerging market bond sale, selling $ 17.5 billion of debt in the government’s first international offer while attracting investor orders totaling almost four times that amount.

The huge demand, larger than many market participants had expected, was partly due to ultra- low global interest rates and funds’ frustration with a lack of high- yielding assets around the world.

But the sale was also a success for the world’s top oil exporter in its efforts to convince investors that it can cope with an era of low crude prices and ultimately reduce its dependence on oil.

London- based Capital Economics estimated that the US dollar issue would finance around a third of next year’s state budget deficit and almost all of the kingdom’s current account gap, meaning its foreign exchange reserves were unlikely to fall much further in coming years.

The previous record for an emerging market sovereign bond sale was a $ 16.5 billion issue by Argentina in April. A source familiar with the offer said order books totaled $ 67 billion, coming close to the $ 69 billion record set by Argentina.

The successful bond sale may be a good omen for the initial public offer of shares in state oil giant Saudi Aramco. Expected to take place in 2018, that offer could raise tens of billions of dollars.

The bond sale was also helped by a rebound of oil prices above $ 50 a barrel in recent weeks from around $ 30 early this year, after Saudi Arabia changed course and decided to support output cuts by OPEC.

Riyadh ran a record budget deficit of $ 98 billion last year – 15 percent of GDP – and is struggling to cut the gap this year.

It turned to the international markets to finance part of its deficit after domestic investors, starved of petrodollars, began finding it hard to buy government bonds.