* 15 bln riyals of bonds sold to local banks so far
* Helps to cover huge budget deficit caused by cheap oil
* Will reduce pressure to draw down foreign reserves
* Banking system liquidity unlikely to tighten initially
* Step towards developing local debt market
(recasts with analysis, context)
By Marwa Rashad and Angus McDowall
RIYADH, July 10 Saudi Arabia has issued its
first sovereign bonds since 2007 to cover a budget deficit
created by low oil prices, launching a series of debt sales that
could reshape its financial markets.
The government sold 15 billion riyals ($4 billion) of bonds
to local banks this year, Friday's al-Iqtisadiya daily quoted
central bank chief Fahad al-Mubarak as telling reporters.
The report did not reveal financial terms or say exactly
when the sales occurred, or whether the local currency bonds
were sharia-compliant, which would allow them to be bought by
But they mark a big shift in Saudi policy. Until this year,
the world's top oil exporter focused on paying down its public
debt, which totalled just 44 billion riyals at the end of 2014,
about 1.6 percent of gross domestic product.
While a few state agencies or state-controlled firms have
issued bonds in the past few years, the government's last
sovereign development bond was issued in 2007.
But because of the plunge in oil prices since June 2014,
Riyadh faces a huge budget gap this year, which Mubarak said was
expected to exceed the originally projected 145 billion riyals.
The International Monetary Fund has estimated the deficit will
be about 20 percent of GDP, or approximately $150 billion.
So far Riyadh has mainly been running down its financial
reserves to cover the deficit; Mubarak said the government had
withdrawn 244 billion riyals from reserves in 2015.
This has cut the foreign assets held by the central bank,
which is the kingdom's sovereign wealth fund. Its net foreign
assets -- mostly U.S. dollar bank deposits and bonds -- fell to
$672 billion in May. The start of Saudi bond sales means
pressure for the reserves to fall may now decrease.
"We will see increased borrowing in the coming months,"
Mubarak was quoted as saying, adding that the deficit would be
financed by both reserve drawdowns and bond issues.
Mubarak did not estimate the size of future bond sales. But
cash-rich Saudi banks have plenty of room on their balance
sheets to buy government debt, suggesting that initially at
least, the sales will not tighten banking system liquidity much.
Commercial banks had 1.65 trillion riyals of deposits at the
end of May, against 1.31 trillion riyals of lending to the
Significant amounts of the new bonds are unlikely to find
their way into the hands of foreign investors, since local banks
tend to hold bonds to maturity and yields on Saudi bonds are too
low to interest many foreigners.
But a major sovereign issuance programme could buoy the
financial sector in other ways, by giving Saudi banks the highly
rated assets they need to meet global Basel III liquidity
requirements, and by stimulating the domestic debt market.
Regulators want to encourage companies to issue bonds as
alternatives to bank loans, which now dominate corporate
fund-raising. This would spread corporate risk beyond the
banking system, making the financial sector more healthy, and
provide more channels for a growing investment industry.
A regular supply of government debt could pave the way for
more corporate debt issues by creating benchmark prices and
developing a commonly accepted yield curve.
"Issuance at this stage is intended to reach two goals:
create alternative sources of revenue, but also reinvigorate the
debt market," said John Sfakianakis, Riyadh-based Middle East
director at fund manager Ashmore Group.
"For the development of debt capital markets, issuance
should continue and involve a variety of buyers."
(Writing by Andrew Torchia; Editing by Catherine Evans)