* Banks have been discussing matter since early this year
* Domestic bond issues began in July
* Discussing creation of debt management office
* Initial issue might be $1-2 billion - Gulf source
* Could issue two to four times a year (Adds more sources, context)
By Tom Arnold and Hadeel Al Sayegh
DUBAI, Nov 10 (Reuters) - Saudi Arabia aims to start selling bonds in the international market as soon as next year as it seeks new ways to cover a budget deficit caused by low oil prices, banking industry sources said on Tuesday.
The sources, who have been discussing the matter with officials in the central bank, the Saudi Arabian Monetary Agency (SAMA), said authorities had not yet finalised the plan but were making progress.
“If it’s going to be January, June or 2017, I’m not sure,” said a senior Gulf banker, declining to be named because of commercial sensitivities. “But it’s something that’s top of their minds.”
A Saudi commercial banker said bankers were pitching to both the finance ministry and SAMA.
“The ministry ... is borrowing but SAMA would be the issuer. In my opinion, I don’t think there will be a mandate til next year,” he said.
The Saudi central bank and finance ministry did not respond to requests for comment.
In July, the government began issuing about 20 billion riyals ($5.3 billion) of domestic bonds every month - its first sovereign bond sales since 2007 - to help fund its deficit, which has widened as the price of crude has shed more than half its value since June 2014.
The International Monetary Fund estimates the shortfall in the public accounts of the world’s biggest oil exporter is now running at over $100 billion annually.
But the domestic bond issues have started pushing up Saudi money market rates by draining liquidity from banks. International bonds, which foreign banks have been pitching since early 2015 to manage, could relieve some of this pressure.
An international debt programme would be a major policy shift by Riyadh, which has been very conservative towards bonds in recent years. Public debt dropped to a miniscule 1.6 percent of gross domestic product at the end of last year.
The IMF estimates this figure will rise to 44 percent by 2020. The Saudi government has been discussing creating a debt management office to handle issues, the sources said.
The Gulf banker said Saudi Arabia’s first international issue would be a test case so would probably have a maturity of around 10 years. After that, it might consider longer maturities such as 30 years.
The initial issue would likely be in the region of $1 billion to $2 billion, he added. “There’s not a number we have discussed but they would be looking at a substantial benchmark size...
“The most they would be able to tap the international market would be two or four times a year,” he added.
Last month, Standard & Poor’s cut its sovereign long-term ratings for Saudi Arabia to ‘A-plus/A-1’, citing low oil prices.
But at present only a few Saudi entities, mostly state-linked ones such as utility Saudi Electricity Co , have outstanding foreign bonds. So bankers believe Saudi sovereign debt would find a market.
“Any issue would be significantly tighter than Bahrain and look more like Qatar or Abu Dhabi,” the Gulf banker said of the bonds’ expected price range. (writing by Andrew Torchia; editing by John Stonestreet)