By Kamran Bokhari
According to a March 9 Reuters report, Saudi Arabia is seeking a bank loan of between $6 billion and $8 billion. Quoting unnamed sources, the wire service said that the kingdom has sought proposals for a five-year loan from potential lenders. This would be its first acquisition of an external loan in more than a decade. Riyadh has also sought the option to increase the loan, which is supposed to go toward reducing the budget deficit caused by the plunge in the price of oil. This comes within days of the Saudis asking banks to consider an international loan, although the amount and duration were not specified. The monarchy is seeking advice on the matter from the London-based firm Verus Partners, set up by former Citigroup bankers Mark Aplin and Andrew Elliott. Verus Partners has submitted requests for the proposals on behalf of the Saudi Finance Ministry. The firm said that banks participating in the loan would have a better chance of being chosen to arrange an international bond that the kingdom could issue during the current year.
Saudi Arabia has been in a financial crisis for some time, which Geopolitical Futures previously described in a detailed study. That it is seeking a loan to help manage a budget deficit underscores how the kingdom’s growing financial obligations – both at home and abroad – are outstripping its resources. The country’s weakening will not only have a major impact on domestic stability, but also on regional security as the kingdom is struggling to contain the growing chaos in the Arab world.
Riyadh’s budget deficit amounted to about $100 billion in 2015 – a hole that the Saudis are currently plugging by pulling cash out of their foreign exchange reserves and issuing domestic bonds. Already, they have used up as much as $110 billion in a little over a year and the Saudis could easily exhaust their reserves, estimated currently at around $600 billion, in roughly four years. Given that it will need hundreds of billions of dollars over the next several years, a loan of up to $8 billion over five years will do little to solve Saudi Arabia’s problem. Meanwhile, the domestic bonds have begun to rapidly decrease liquidity in the country’s banking system. Last month, Standard & Poor’s dropped the kingdom’s long-term sovereign credit rating by two notches to A-. Though the other two major rating agencies maintain much higher ratings for the country, Moody’s Investors Service last week initiated a review for a possible downgrade.
The sharp drop in oil prices will continue to force the kingdom to prioritize the home front over the region. It is unclear to what extent the Saudis can manage the domestic arena in the coming years. What is clear is that Riyadh cannot use its traditional tool of providing financial assistance to gain influence with its allies in the region. Greater regional anarchy will result from the tightening limits on Saudi financial bandwidth.