Early last month in “Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed's Blessing,” we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has blown a giant hole in the country’s fiscal account, was set to tap the debt market in an effort to offset a painful petrodollar reserve burn.
“Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter,” FT reported at the time.
The reason this is so ironic is that at various times, we’ve characterized persistently low crude prices as essentially a battle between the Fed and the Saudis. Many struggling US producers would likely have been out of business months ago were it not for the fact that ZIRP has kept capital markets wide open, allowing otherwise insolvent drillers to stay afloat. Obviously, that works at cross purposes with Riyadh’s efforts to “preserve market share”, and so ultimately, the Saudis are betting their FX reserves can outlast ZIRP.
There are other factors at play here that weigh on Saudi Arabia’s financial situation including two proxy wars and the defense of the riyal peg which is why turning to the bond market is an attractive option especially considering that capital markets are so favorable thanks to - and here’s the irony - the very same Fed policies that are keeping US shale producers in business.
But Saudi Arabia’s “war” with the US shale space isn’t unfolding in a vacuum and now Qatar is looking to borrow to alleviate the financial strain. Here’s more from Bloomberg:
Qatar issued 15 billion riyals ($4.1 billion) of bonds on 1 September as the country takes advantage of low borrowing costs to replenish funds eroded by the decline in oil prices.
The sale, intended to boost the local capital market, was four times oversubscribed, central bank Governor Abdullah Bin Saoud Al Thani told reporters in Doha, without commenting on the bond’s duration or pricing.
Qatar follows Saudi Arabia in raising money from local banks as the slump in oil prices buffets the finances of the Middle East’s largest oil and gas exporters. Saudi Arabia said it tapped local markets in June and August and has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007. Qatar needs an oil price of $59.1 dollars a barrel to balance its budget, according to the IMF, and on 29 August said its trade surplus fell 56 in July. Crude dropped below $45 a barrel on 2 September.
“The policy of the central bank is to manage liquidity,” Al Thani said. “Interest rates are low in Qatar now so we decided it was the right time to issue these bonds and sukuk.”
Meanwhile, liquidity is tightening across the region, prompting banks to borrow in order to accommodate a slow down in deposit growth. Bloomberg has more:
First Gulf Bank PJSC, the United Arab Emirates’ third-biggest bank by assets, is seeking to raise about $1 billion from a syndicated loan to boost lending as liquidity in the economy tightens, two bankers familiar with the deal said.
The Abu Dhabi-based lender is paying less than 1 percentage point over the London interbank offered rate for the three-year facility, said the people, asking not to be identified because the information is not yet public.
Banks in the six-nation Gulf Cooperation Council, which includes the U.A.E. and Qatar, are turning to the loan market to raise funds in addition to selling bonds as a drop in crude prices threatens economic growth in the oil-producing region. Qatar National Bank SAQ, the country’s biggest lender, borrowed $3 billion via a syndicated loan in March and Abu Dhabi-based Union National Bank PJSC is planning a $750 million 3-year facility, three people familiar with the matter said last month.
Bank liquidity in the U.A.E., the second-biggest Arab economy, is tightening as an increase in lending outpaces deposit growth. The loans-to-deposits ratio of the U.A.E.’s 49 banks climbed to 100.2 percent in June from 95 percent a year ago, rising above 100 for the first time since September 2013.
Of course the punchline to it all is that the fall of the petrodollar has effectively brought an end to emerging market FX reserve accumulation and as the drawdown of those assets tightens global market liquidity and puts upward pressure on UST yields, the Fed will effectively be forced to delay its first rate hike or else will be compelled to immediately reverse itself once the ill-effects of tightening into a tightening become clear. That, in turn, means that the longer the Saudis keep oil prices suppressed and the longer the epic EM FX reserve drawn down continues, the longer the Fed will cling to ZIRP and thus the longer insolvent US drillers will keep drilling and around we go in a vicious deflationary, self-defeating loop.