* Saudi government borrows more to cover deficit
* Local debt market is source of resilience
* State institutions' exposure to local debt rises
* This increases links to Saudi sovereign risk
* Deeper state ties may complicate liabilities
DUBAI, Nov 12 (Reuters) - Saudi Arabia is increasingly
relying on state-owned investors to finance itself amid the
coronavirus pandemic, a strategy that raises questions about how
exposed ordinary Saudis could be to a sovereign shock.
The government-backed institutions - namely the pension fund
and insurance agency - have seen their domestic debt holdings
nearly double in the first six months of this year as Riyadh
finances a yawning budget deficit through bond sales.
Their ultimate exposure to Saudi Arabia Inc, however,
remains under wraps because the government does not provide
comprehensive and up-to-date breakdowns of their investment
holdings or their returns.
"In normal times the funding of the government from its own
related entities may cause concern over transparency of the
ultimate debt figure and over the autonomy of those related
entities," said Hasnain Malik, head of equity strategy at
"However, this concern over the total liabilities of all
government entities has existed for some time in other parts of
the GCC (Gulf Cooperation Council) and funding very large fiscal
deficits probably requires some unorthodox tactics."
Using local debt to finance deficits and having state funds
investing in it is quite common across emerging and developed
economies, and it has some benefits, such as reducing currency
mismatch risks, investors and analysts say.
In Saudi Arabia, the move also has the advantage of not
soaking up banks' liquidity, which happened after the 2015 oil
price crash, when government debt issuance pressured Saudi
At the same time, it could make Saudis who are reliant on
the Public Pension Agency (PPA) and the General Organization for
Social Insurance (GOSI) "over-exposed to Saudi sovereign risk,
which would become problematic if Saudi government securities
underperform other domestic or international investments," said
Krisjanis Krustins, a director in Fitch's sovereign team.
The Saudi government, asked whether authorities encouraged
state institutions to increase their exposure to government
debt, told Reuters demand for local sovereign debt increased
this year across investor types due to market volatility in
other asset classes.
It said indebtedness is updated on a quarterly basis to
reinforce market transparency, and that demand for local debt
helped it manage supply levels in the foreign markets, therefore
protecting credit spreads. It did not respond to questions on
GOSI and PPA's investment portfolios.
The coronavirus pandemic has led central banks across the
world to add local assets to their portfolios and, more
generally, to a greater state involvement in the economy.
Saudi Arabia, the world's largest crude exporter, was hit
especially hard by the economic fallout from COVID-19. Lower oil
revenues blew out the government deficit, more than doubling
Saudi Arabia's funding needs this year to $85 billion, according
In the early phases of the crisis, Riyadh raised its public
debt ceiling to 50% of GDP from 30% to have more fiscal leeway.
It also transferred $40 billion from central bank foreign
reserves to fund investments by sovereign wealth fund Public
A chunk of the new funding was covered by institutions such
as the PPA and the GOSI, which fund state employees' retirement
income and social welfare benefits for ordinary Saudis
PPA and GOSI, which did not respond to Reuters requests for
comment about their investments, do not provide a detailed
breakdown of their finances. This is not unusual in the Gulf but
when compared to similar agencies across developed and emerging
markets, Saudi disclosures lag.
Government institutions' holdings of domestic debt increased
to 166.9 billion riyals ($44.50 billion) by the end of June from
92 billion riyals at the end of last year, while Saudi
commercial banks' exposure to government domestic debt rose by
just over 20 billion riyals in the same period.
Riyadh has increasingly used debt to fill state coffers
since oil prices crashed in 2014-2015 but debt levels, expected
to hover around 32-33% of GDP in the coming three years, are
considered still relatively low.
The finance ministry has said it expects the government
deficit to spike to 12% of GDP this year from 4.5% last year.
According to Garbis Iradian, chief economist for the Middle
East and North Africa at the Institute of International Finance,
some $25 billion of this year's fiscal deficit - which he
estimates at around $72 billion, or 10.2% of GDP - will be
financed from domestic banks and institutions such as the
national pension and insurance agencies.
The rest will be covered by tapping official reserves for an
amount of $32 billion, and with $15 billion in external funding,
"The strategy of developing the local debt market to reduce
dependency on external instruments is good. It's encouraging and
doing all the right kind of things," said Tim Ash, senior
emerging market sovereign strategist, BlueBay Asset Management.
But he said his fund had not invested in the domestic market
because of wider concerns over the stability of regional
currency pegs. The Saudi riyal is pegged at 3.75 to the dollar
in the spot market, but the currency saw some volatility in the
forwards market this year as oil prices dropped.
For Rachel Ziemba, adjunct senior fellow at the Center for a
New American Security, a Washington think tank, the active
involvement of domestic pools of capital in financing the
deficit is a "source of resilience," and similar moves in other
emerging markets have helped offset the impact of capital flow
"My big concern is less the deployment of state stockpiles,
which are there for a rainy day, and more a concern about
whether transparency about government spending and links between
state-linked entities will be worse," she said.
($1 = 3.7504 riyals)
(Reporting by Davide Barbuscia and Yousef Saba; additional
reporting by Tom Arnold in London;
Editing by Carmel Crimmins)