How will Saudi's bond sale affect construction?

The sale marks the latest step in Saudi Arabia's efforts to move away from its oil-dependent economy and diversify its revenue streams

The above image is for illustrative purposes only.
The above image is for illustrative purposes only.

Saudi Arabia is looking to revitalise its economy in the wake of the oil-price decline with the sale of bonds.

The kingdom's biggest ever international bond sale, which took place on 19 October, 2016, generated $17.5bn (SAR65.63bn), and was four times over-subscribed.

The KSA government sold a range of dollar-denominated bonds: five-year securities at yields of 135 basis points; 10-year securities at yields of 165 basis points; and 30-year securities with yields of 210 basis points.

The sale marks the latest step in Saudi Arabia's efforts to move away from its oil-dependent economy and diversify its revenue streams.

Industry experts told Construction Week that the bond proceeds would be instrumental in building confidence in the kingdom's government, which is looking to boost its real estate and construction sectors.

Craig Plumb, JLL's head of research for the Middle East and North Africa (MENA) region, commented: "The bond sale is an indication that the Saudi government is actively pursuing its strategy of looking at alternative sources of funding to finance its budget deficit. [This] forms part of the kingdom's strategy to diversify its economy away from the oil sector.

"This, in turn, will improve the government's ability to fund the ambitious real estate projects it wishes to complete over the next few years. These include [developments] such as King Abdullah Financial District (KAFD), King Abdullah Economic City (KAEC), infrastructure investments such as the [Haramain High Speed Rail project], the expansion of major airports, social infrastructure, and [initiatives] that address the continued shortage of affordable housing."

The latest bond sale is expected to set a benchmark for the kingdom, and pave the way for the assistance of contractors by generating additional construction work. At present, the government is represents the primary client for construction outfits operating in Saudi Arabia.

David O'Hara, director and head of Cluttons Saudi Arabia, is confident that the sale will have a long-term impact on Saudi Arabia's construction sector.

He explained: "When the country is issuing such bonds, it means that the international bond market is very confident about what Saudi Arabia is doing. The observers are seeing strength in the market, and this ensures a solid placement of the bond [at a] global level. I think [that this] was lacking before, when the government was entirely focussed on oil revenues."

While O'Hara warned that the sale would not result in more projects, he said that it would help to boost market liquidity and, in turn, facilitate existing developments' progress.

"We won't see new projects being built," he elaborated. "Instead, the issuance of bonds was focussed on revitalising the economy. It's a step-by-step process to make sure that there is liquidity in the market, which will hopefully go through to construction and real estate companies."

In addition to Saudi Arabia's bond sale, this year has seen other GCC member states conduct substantial debt issuance activities. In Q2 2016, Qatar issued a $9bn (QAR32.77bn) debt offering, the second-largest in GCC history. Meanwhile, Abu Dhabi conducted a $5bn (AED18.36bn) dual-tranche transaction, and Oman held a $2.5bn (OMR960m) sale of five- and 10-year bonds. 

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