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Saudi Arabia’s DMO to help develop a yield curve for other issuers

Plans for the creation of a debt management office (DMO) in Saudi Arabia demonstrate how it has begun turning to alternative forms of financing amid low oil prices. The DMO would likely assist in the sovereign’s planned bond sale, which could help create a yield curve for local corporates to follow.

May 31, 2016 // 5:19PM

Saudi Arabia is in the process of creating a DMO that according to those with knowledge of the plans will be responsible for the Kingdom’s debut international bond sale.

Earlier in May, the country sent invitations to banks for to arrange a bond sale that is likely to occur around September.

“Volatility in the oil and gas sector is having an impact on Saudi revenue streams, and the lower prices present today combined with continuing high levels of spending has increased the likelihood of an increase in the country’s debt levels,” said Edgar Van Der Meer, Senior Analyst at NRG Expert.

The creation DMO follows other moves in the country designed to strengthen its economic governance and reduce the Kingdom’s reliance on oil revenues.

“Its creation would be a very sensible decision and indicates that Saudi Arabia is thinking strategically about its revenue requirements rather than taking a knee-jerk approach based on ad-hoc bank loans,” said Andrew Cunningham, Founder of Darien Analytics.

He added that the Central Bank has been raising money from local banks regularly and predictably since last year, and the creation of a DMO indicates that the Kingdom is looking to develop a more sustainable way of raising money in a similar way from international financial markets.

A Saudi DMO, much like the DMOs of other countries, would also allow Saudi Arabian corporates to access markets more frequently by following the sovereign.

“Local corporates will be hoping that the Saudi government issues debt with a variety of maturities in order to create a sovereign yield curve that they can use as a benchmark for the pricing of their own debt,” Cunningham added.

Middle East Energy Policy & Government

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