Saudi Arabia is seeking a $10 billion loan from international banks, according to Reuters, which represents the country’s first major loan in more than a decade.
The Saudi government is hoping to discuss the matter with several unnamed banks, and while the amount was also not disclosed, a source told Reuters that it could top $10 billion. Related: In Risky Move Wall St. Backs Shale With Nearly $10 Billion In Equity
To be sure, Saudi Arabia has a massive pile of foreign exchange that will allow it to weather the oil price downturn for years, although few expect oil prices to remain below $40 for that long. Still, the Saudi government surely does not want to burn through all of its cash reserves. In fact, Saudi reserves dropped below $600 billion for the first time in almost four years. The OPEC member burned $14.3 billion in January, the third month in a row that it used more than $10 billion. Is recently as the summer of 2014, Saudi Arabia’s foreign exchange sat well above $700 billion.
With oil prices so low, Saudi Arabia estimated in late 2015 that it ran a budget deficit of $98 billion for the year. The trajectory is unsustainable. S&P downgraded Saudi Arabia’s credit by two notches in February, from A+ to A-. Related: The U.S. Still Dominates World Oil Prices
It now appears that the Saudi government wants to turn to international lenders to help plug the budget hole. As one of the world’s largest oil producers with a huge war chest of cash reserves, Saudi Arabia shouldn’t have trouble finding any lenders. Not only that, but Reuters says that banks might be eager to lend to Saudi Arabia because it could improve their chances of being selected to conduct the bond offering that Saudi Arabia is planning on holding later this year.
Still, borrowing costs will likely be much higher than what would have been offered a year or two ago. For example, Qatar took a $5.5 billion loan from international lenders in January, much lower than the expected $10 billion that was anticipated, reportedly because the offered interest rates were too high.
By Charles Kennedy of Oilprice.com
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