Key Points:
- Global public debt has surged during the pandemic, putting many countries at risk of financial instability.
- Saudi Arabia’s National Debt Management Center (NDMC) has successfully pursued a sustainable debt strategy with robust risk management.
- NDMC has diversified its investor base, tapping into the euro market and accessing financing from international organizations.
- Saudi Arabia has implemented a unified sovereign asset and liability management framework, addressing interest rate and foreign exchange risks.
- Challenges remain, including aligning various stakeholders, managing contingent liabilities, and meeting credit rating agency expectations.
- Despite challenges, Saudi Arabia’s public debt is progressing well towards sustainability, aided by positive external factors and ambitious national initiatives.
Global public debt has skyrocketed during the pandemic as countries implemented fiscal stimulus measures to mitigate the impact on economic growth. However, this surge in debt has raised risk levels and left many countries vulnerable to financial instability. Developing and emerging nations, in particular, are struggling, with their current debt levels 20 to 25 percentage points of GDP higher than pre-2008 and the global financial crisis, according to IMF research. This has led to a record number of sovereign defaults in 2020, and the risk of further debt crises looms over economies into 2022.
For any country that issues public debt, the primary concern is not securing immediate funding needs but rather building a sustainable sovereign debt with proper asset and liability management. Saudi Arabia’s National Debt Management Center (NDMC) has successfully pursued a well-structured, sustainable debt strategy with robust risk management, even amid the challenges posed by the pandemic.
Established in late 2015, the NDMC aims to secure the sustainability of Saudi Arabia’s access to debt markets worldwide, funding the country’s budget deficit with the best possible cost structure and ensuring appropriate funding for infrastructure projects. Despite striving for economic diversification through the Saudi 2030 Vision framework, Saudi Arabia still heavily relies on oil and remains vulnerable to price volatility. The severe plunge in oil prices during the pandemic posed significant challenges, but the NDMC swiftly revised its debt plan and added SAR 100 billion ($26.7 billion) in debt, reaching a total public debt issuance of SAR 220 billion in 2020.
The NDMC has diversified its investor base to enhance the sustainability of Saudi Arabia’s debt. Initially, the focus was primarily on borrowing in Saudi Arabian riyals (SAR) and, to a lesser extent, US dollars. However, the NDMC tapped into the euro market and accessed a broader investor base through €3 billion issuances in 2019 and €1.5 billion in 2021, including the largest ever negative-yield euro issuance outside the eurozone. This diversification has improved investor access, market liquidity, and Saudi debt attractiveness. Furthermore, the inclusion of local currency Sukuk in the FTSE Emerging Markets Government Bond Index (EMGBI) in April 2022 will greatly aid investor access and enhance Saudi debt’s attractiveness.
In addition to diversifying the investor base, Saudi Arabia has implemented a unified sovereign asset and liability management (SALM) framework. This framework integrates financial and non-financial assets and liabilities, allowing for a better estimate of net-risk exposure. It enables the NDMC to understand natural hedging possibilities and make more informed decisions. The SALM framework also helps improve debt sustainability and supports investors’ analysis and credit rating agencies’ assessments.
The NDMC pays close attention to interest rate risk, with 82.6% of the overall debt cost based on fixed interest rates and only 17.4% based on floating rates. The NDMC took advantage of relatively low-interest rates to issue over 50% of the debt portfolio, capturing favorable pricing levels. The average duration of the overall debt portfolio is 9.52 years, indicating sensitivity to changes in the yield curve. Increasing the average maturities of debt reduces liquidity and refinancing risks, typical risk components for public debts.
Regarding foreign exchange risk, around 60% of Saudi Arabia’s debt is denominated in Saudi riyals (SAR), while 40% is non-SAR exposure, primarily in US dollars. The Saudi Central Bank (SAMA) maintains sufficient foreign exchange reserves to defend the peg of the SAR to the US dollar. These reserves, combined with solid net foreign assets, significantly mitigate foreign exchange risk. SAMA’s net foreign asset position and foreign cash and deposit holdings provide stability and confidence in the SAR’s peg to the US dollar.
While Saudi Arabia has made considerable improvements to its debt profile, challenges remain. Achieving alignment and coordination among various stakeholders, including the central bank (SAMA), the Ministry of Finance (MoF), and the NDMC, is crucial. Conflicts may arise due to differing priorities and objectives, impacting overall monetary policy and debt sustainability. Maintaining a close grip on debt and credit agency expectations, as well as managing contingent liabilities, are also key considerations.
Despite these challenges, Saudi Arabia’s public debt is progressing well towards sustainability. The NDMC’s 2022 Annual Borrowing Plan expects debt to remain at SAR 938 billion until year-end 2024, with refinancing activities targeting existing maturities. The country’s growth expectations are healthy, accompanied by an expected budget surplus and a decreasing public debt-to-GDP ratio. Furthermore, positive external factors such as a surge in oil prices and ambitious national initiatives, including the Saudi sovereign wealth fund (PIF) and mining investments, contribute to improving debt sustainability and creating growth opportunities.
