Asset-rich, cash-poor

IT WAS not a hard sell. On August 10th Saudi Arabia issued bonds worth 20 billion riyals ($5.3 billion). Local banks, the only institutions allowed to take part in the sale, have lots of spare cash. The price was appealing, too: the ten-year bonds (there were also five- and seven-year issues) will yield almost half a percentage point more than their American equivalents.

The government did not publicise the sale, but it was hardly a surprise given its deteriorating finances. To maintain spending despite falling oil revenue, it has been cashing in foreign assets at a rapid clip: $60 billion in the first six months of the year. In July Fahd al-Mubarak, the head of the Saudi Arabian Monetary Agency (SAMA), the kingdom’s central bank, announced the government had raised $4 billion selling bonds to state-owned institutions, and talked of more sales to come.

Saudi Arabia does not like borrowing—the last time it issued bonds was in 2007—but the books are not balancing. Oil makes up 90% of government revenues, and its price, roughly $50 a barrel, is less than half what it was in June last year. That is partly Saudi Arabia’s doing: it has not reined in its production, as it typically does when the price falls, but instead pumped record amounts in the hope of putting producers with higher costs out of business.

At the same time Saudi Arabia’s spending has been increasing. Lavish public-sector wages, grandiose infrastructure projects and hefty subsidies on power, fuel and other consumer goods have long gobbled up most of the budget. But Saudi Arabia’s new king, Salman, who came to power in January, is also pursuing a more active, and expensive, foreign policy. He and his son, the defence minister and second-in-line to the throne, have launched a war in Yemen (involving bonus pay for the army) and are spending on aid projects to counter Iran’s influence across the region. At home, the government is having to beef up security in response to a terror campaign by Islamic State, which bombed a Saudi mosque on August 6th—its third attack on the kingdom. The IMF predicts a budget deficit of 20% of GDP this year, but that may turn out to be an underestimate, a local economist says.

The government plans to sell bonds each month until the end of the year, raising 100 billion riyals in total. Economists reckon there will be further issuance in 2016, perhaps to foreign buyers. “Given the size of bonds and debt, they will tap the international market,” says John Sfakianakis, the Riyadh-based Middle East director at Ashmore Group, a fund manager.

Saudi Arabia has plenty of leeway to borrow (see chart). Before the new bonds were issued, its debts stood at just 1.6% of GDP. Against that, it held foreign reserves of $672 billion in June, or 93% of GDP. In the 1990s, after a prolonged spell of low oil prices, Saudi Arabia’s debt rose to more than 100% of GDP without sending its borrowing costs spiralling. Officials point out that government debt will also help to develop the nascent financial sector, by creating benchmark prices and yields.

Yet as the population of 30m grows, and especially if the oil price remains low, it will have to reform as well as borrow. Officials talk of boosting the private sector and conserving energy. But to provide an incentive for change, they will have to cut subsidies and public-sector jobs. That is a far harder sell than bonds.