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What's going on?
Saudi Arabia borrowed money from international investors for the first time ever on Wednesday, and in doing so, it set the record for the most an emerging markets country has ever borrowed!
What does this mean?
The big decline in the price of oil has hit Saudi Arabias finances hard, and the country is supplementing some of its lost income with freshly borrowed dollars – by issuing bonds. Its all part of a plan (first outlined six months ago by Saudi Arabias new Crown Prince) to help diversify the Saudi economy away from its historical reliance on producing oil. The government will use the money to pay some of its bills while it works on fostering new industries.
Why should I care?
The bigger picture: Saudi Arabia could be a very different country in the coming years.
For decades, Saudi Arabia has used its oil-generated wealth to provide its citizens with a relatively high quality of life, including free healthcare and high salaries for government workers. But with the oil price so low (half of its 2014 value), Saudi Arabia cant afford to maintain that strategy. As it looks to develop new industries, its relatively young workforce is an advantage as it provides a pool of well-educated potential workers. But the transition is not without risks, including the potential for social and political upheaval.
For the market: Saudi Arabias new bonds pay a higher interest rate than comparable US government bonds.
Because it can literally print its own money, the US government should never be unable to pay back its debt (note: unwilling is a different, political matter). Saudi Arabia could, on the other hand, conceivably notbe able to pay back those who have lent it money. To account for this risk, Saudi Arabia is paying investors a higher interest rate than comparable US government bonds (about 1-2% more, depending on the bonds time-to-expiry).
Originally posted as part of the Finimize daily email.
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