This year, Saudi Arabia has replaced China as the largest bond seller in emerging markets, breaking China’s record of being at the top for 12 consecutive years. Meanwhile, China’s international bond sales have decreased by 68% compared to the five-year average since 2019.
According to Bloomberg’s report on Wednesday, data on new government and corporate bond sales this year shows that Saudi Arabia’s borrowing pace has hit a historic high, with global debt investors starting to support Saudi Crown Prince Mohammed bin Salman’s “Vision 2030” plan. On the other hand, Chinese borrowers are experiencing a buying frenzy of domestic yuan bonds, leading to a slowdown in international bond issuances to one of the slowest levels in recent years.
Surpassing China in borrowing is significant for Saudi Arabia. The country’s GDP accounts for 1/16 of Asia’s total. Saudi Arabia aims to become a global business hub by the end of 2030. Recent data shows that with improving market sentiment, Saudi Arabia is seeking funds for this plan to reduce its reliance on the oil industry, positioning itself as a link between Asia and Europe. At the same time, with borrowing costs decreasing and a quest for high returns, other emerging markets are also experiencing a fruitful year for bond issuances.
Apostolos Bantis, Managing Director of Fixed Income Advisory at Union Bancaire Privee (UBP) in Zurich, Switzerland, stated, “The market sentiment on Saudi bonds is very optimistic,” and “considering Saudi Arabia’s heavy financing needs for large infrastructure projects, it’s not surprising that Saudi Arabia has become the largest emerging market bond issuer.”
So far this year, Saudi Arabia’s bond sales have increased by 8%, surpassing $33 billion, with over half of this being government bond sales, including a $5 billion Islamic bond transaction last month.
Saudi Arabia is actively seeking other sources of funds to help mitigate an expected fiscal deficit of around $21 billion this year. The total financing for Saudi Arabia is expected to reach around $37 billion this year. The country’s shift towards the bond market on such a large scale is partly due to foreign direct investment falling short of targets and oil revenues being suppressed due to reduced supply.
The country’s borrowing has caught the attention of some fund managers. Barclays bank in the UK has downgraded Saudi Arabia’s sovereign credit rating from market weight to underweight, citing “recurring” bond issuances, falling oil prices, and tensions in the Middle East.
Bantis of UBP stated, “Saudi Arabia cannot sustain its current bond issuance pace in the long run as it will start to impact its fundamentals and financing costs.”
In summary, international bond sales in emerging markets have increased by 28% compared to the same period last year, reaching $291 billion, the highest level for the same period since 2021. According to Bloomberg’s index, when investors buy emerging market bonds (sovereign and corporate bonds combined) instead of U.S. Treasury bonds, they are demanding an additional yield of around 266 basis points, lower than the five-year average of 336 basis points.
This year, the China Development Bank and Chinese enterprises have collectively sold $23.3 billion worth of bonds denominated in U.S. dollars and euros. This is a 68% decrease compared to the average government and corporate bond sales since 2019. Currently, China only accounts for 8.1% of borrowing in emerging markets, which is far from 2017 when China accounted for a third of all issuances with a massive volume of $224 billion.
Unlike the trend with U.S. dollar bonds, as borrowing costs hit historic lows, China is experiencing an unprecedented issuance of yuan-denominated domestic bonds.