Saudi Arabia eyeing rare $10bn sovereign loan: Report

Saudi Arabia is in talks with banks on Wall Street about obtaining a $10bn sovereign loan, as the kingdom continues to tap debt markets to fund its economic transformation plan.

Bloomberg reported that the loan is still being negotiated. The move would mark a departure for Saudi Arabia, which has generally issued bonds to raise funds in recent years. Bonds are tradable on the open market, whereas sovereign loans generally are not. The terms for loans can also be more private compared to bonds.

Saudi Arabia is spending trillions of dollars as part of Crown Prince Mohammed bin Salman’s effort to refashion the Saudi economy away from a dependence on oil revenue.

But the country is facing headwinds among lacklustre interest from foreign investors in big-ticket projects like the futuristic city of Neom.

Saudi Arabia also has to contend with lower energy prices. The international benchmark Brent was trading up 1.2 percent on Wednesday at $66.22 per barrel.

The drop in prices is due to a number of factors, including record US oil production.

Saudi Arabia is also behind a push by the Opec+ energy alliance to boost oil production that has helped bring down energy prices. It is part of a bid to punish countries Riyadh views as “cheaters” in the alliance who pumped oil above their quotas while the kingdom restricted supply to support prices in recent years.

The increase in production has also helped endear Riyadh to US President Donald Trump, who is contending with sticky inflation.

Scaling back

The downside is that Saudi Arabia has less money to put into lofty mega-projects, which were already being scaled back. For example, the futuristic city of Neom was originally billed as a $1.5 trillion project that would be 33 times the size of New York City and include a 170km straight-line city known as “The Line”.

Instead of 1.5 million people living in the city by 2030, Saudi officials anticipate fewer than 300,000 residents. Meanwhile, only 2.4km of the city will be completed by 2030.

There have been more signs that Saudi Arabia is tightening its belt. The Financial Times reported that foreign consulting firms that earned hefty premiums advising Saudi Arabia on its economic vision plan are reining in hiring.

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Saudi Arabia is far from poverty-stricken. Its Public Investment Fund (PIF) has more than $1 trillion in assets. But PIF governor Yasir al-Rumayyan said last year that the fund would focus more on the domestic Saudi market after splurging on overseas investments - a sign that it has to carry more of the weight in domestic projects amid weaker foreign investor interest.

The kingdom’s budget deficit has been growing and Riyadh expects it to hit 5.3 percent of GDP in 2025. Experts say it will stay in the red for many years to come.

To make up for the shortfall in funds, Saudi Arabia has gone on a debt splurge, and it has been lucky.

Investors have shown interest in Saudi debt, given its relatively high yields and safe economic outlook. The kingdom’s overall debt to GDP is only 30 percent, a very small sum when compared to other G-20 major economies.

The cost of borrowing money for countries in global markets is often measured against the US Treasury yield because of the US’s massive debt burden and outsized influence over the global economy.

The borrowing costs for Gulf states like Saudi Arabia relative to the US have narrowed substantially, which means issuing more debt is costing Saudi Arabia less.