00:00Before we talk about funding and the scale of the borrowing that Saudi Arabia has undertaken,
00:05how much of a surprise was it to anyone who looks at the Saudi Arabian market
00:08that their budget deficit number came so much wider than they had projected at the beginning of the year?
00:14Good morning, Romano.
00:15Indeed, usually the budget that Saudi used to be pretty much respected
00:19and the issuance used to be pretty much respected.
00:22This year it did come as a surprise that the budget was significantly bigger.
00:25But then when you look at the breakdown of that, lower oil prices, lower revenues,
00:29and extreme increased spending would obviously lead to such...
00:33I mean, the fiscal break, even depending on how you look at it and what you include in it,
00:36is around $98 per barrel.
00:38So we're massively lower than that.
00:39Yeah.
00:40So one of the reports that came out last week, my colleague wrote about this,
00:44is the fact that they are leaning less on local listings.
00:49So state-owned companies no longer really going down the path of IPOs.
00:54And what Saudi Inc. has been doing is issuing and relying on a lot more debt,
00:58that's at a sovereign level or via some of these other entities as well, such as PIF.
01:05How much of an impact is that having on their borrowing costs?
01:10The borrowing cost has been wider than other GCC countries and even lower-rated peers.
01:15So we've had this year close to $40 billion of issuance from Saudi between sovereigns, PIF,
01:20and Aramco.
01:21But, yes, spreads are wider than, say, Abu Dhabi and Qatar, 30 to 40 basis points wider.
01:28And if you compare even Saudi to Indonesia, which is, like, significantly lower rating,
01:32Saudi trade few basis points inside of Indonesia.
01:35So this is obviously reflected from the amount of issuing and from the wider spread
01:40and the expected upcoming supply.
01:41But, I mean, it remains a very strong, fundamental country.
01:44Reserves are still very strong.
01:46And I think if you were to compare between, say, Indo and Saudi, you'd go for Saudi any day.
01:50Right.
01:50So let me just ask you about your thoughts on the increased reliance on debt to, you know,
01:57raise the amount of funds that's necessary in the country.
02:00I mean, as a bond investor, do you think that this is a significant development?
02:05Not a massive development yet.
02:07I mean, I think that the shift will be between the two.
02:11We were expecting Saudi to come back to the market before year end.
02:14But now that we saw the news that they're going through international loan instead of coming back to the market,
02:19if the loan goes through, they won't come back.
02:21They will come back in Q1.
02:22So far, the massive change is not significant for spread to move wider.
02:27But, I mean, obviously, if the IPO market closes massively, there will need to be a bigger shift towards that.
02:33And then, yes, I think that we will see a bigger impact on spreads.
02:36Okay.
02:37So we've been talking about sovereign, quasi-sovereign debt issuance.
02:40But also there's been a massive pickup in some of the bank paper issuance as well.
02:44The banks are looking for funding.
02:46Does that create some sort of a cannibalization effect in that it will likely attract these same type of investors?
02:54Or is it not something to be concerned about?
02:56The cannibalization from AT1 is towards re-equities, not towards sovereign.
03:01So the sovereign investors and the massive investors in the sovereign are usually bigger and you have a crossover and you have the Asian investor and the American investor.
03:10When it comes to bank AT1s, issues are smaller usually.
03:13So those usually retail investors would shift away from an equities into the AT1 market.
03:19But I wouldn't see it as impacting the sovereign spreads.
03:22Okay.
03:23And, Zina, let me just bring it back to the macro question, which is, you know, with oil trading around $65, this is the status quo.
03:30So should oil prices drop further, does that, again, raise questions about the risk premium that is embedded in Saudi Arabia's borrowing costs right now?
03:40Absolutely.
03:40So the way we look at it is not oil dropping, but how long oil would stay lower.
03:44But, yeah, absolutely.
03:45If oil drops and stays lower, there will need to be a revision, be it from moving plans, like moving projects or delaying some projects, if possible, and diversifying funding needs.
03:55Because if oil drops and the cuts, I mean, they have revised spending plans for next year.
04:01If this consolidate, oil stays high, we're fine.
04:04If it drops, then I think more serious revision has to be made.
04:07Okay. And while I have you, the big news of the day, the Gaza peace deal, you know, President Trump is heading to Shenmue Sheikh later today.
04:14We're just speaking to Egyptian minister.
04:17Do you expect Egypt to gain some positivity, some dividends on the back of what could be more regional security?
04:25I mean, lower geopolitical risk is obviously positive and seen positively.
04:29From a market's perspective, from a fixed income perspective, even in the midst of a war, the impact was limited.
04:35So I don't think from a credit perspective, maybe from an FDI perspective, it might be more positive.
04:40From a credit's market, there has been some sort of complacency when it comes to this matter.
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