One adage of fixed income markets holds that corporate bonds are nearly always riskier than sovereigns. As a result, corporates almost unfailingly face higher borrowing costs than their national governments.

That maxim was turned on its head this week, when Saudi Aramco, the gigantic state-owned energy company, managed to issue bonds at lower yields than the Saudi Arabian government’s outstanding bonds. There is little precedent for such pricing dynamics. But Aramco’s strong stand-alone credit metrics appear to have helped generate significant interest in the $12 billion, multi-tranche deal, which reportedly enticed orders of around $100 billion. The deal attracted not only the usual emerging-markets-focused entities, but also global investment grade mandates that would typically concentrate on tightly-priced bonds.

Vision 2030

Aramco’s mega-issuance fits neatly into the government’s broader economic vision by helping to mobilise foreign capital, which is seen as a key support for its sweeping and ambitious economic diversification agenda, known as Vision 2030.

The need for diversification is plain: Saudi Arabia’s economy relies too much on the oil sector. Hydrocarbons account for an estimated 70 per cent of the government’s revenues and for nearly all its export earnings. With oil prices having ranged from over $100/barrel to less than $30/barrel in the last five years, the country’s reliance on oil has naturally induced a significant degree of volatility in its macroeconomic performance. This makes Saudi Arabia vulnerable, unless it can reform.

Source: Kingdom of Saudi Arabia,, Fidelity International, April 2019.

Under Vision 2030, authorities have outlined a comprehensive range of reforms to reduce the economy’s oil price dependence over the next decade. Among the many key performance indicators are goals to raise the private sector’s contribution to Saudi GDP to 65 per cent from 40 per cent, to increase women’s participation in the workforce to 30 per cent from 22 per cent, and to lift foreign direct investment to 5.7 per cent of GDP, up from 3.8 per cent today.

The targets are ambitious and may not be all be achieved, but authorities deserve praise for spelling out a clear agenda. Moreover, Saudi Arabia is acting from a position of financial strength, with nearly $500 billion of international reserves and little public sector debt.

Opening the books

The Aramco deal supports this diversification push by helping to put Saudi Arabia on the radar of foreign investors. Aramco is solely owned by the Saudi government and was long thought to be among the world’s most profitable companies, but until recently little hard financial data about it was publicly available. Among the standout facts recently disclosed: Aramco is the world’s most profitable company, reporting a net income last year of $111 billion. The company contributed $166 billion in revenue to the government via royalty taxes, income taxes and dividends.

Its resource base is staggering; its Ghawar oil field alone has greater proven reserves than the five biggest Western independent oil companies (IOCs) combined. Aramco’s total reserves are five times larger than those of the five IOCs. But production at Ghawar has dropped significantly, to 3.8 million barrels per day at present, from over 5 million barrels per day at its peak.

Up next: An IPO?

Aramco may well have used the bond issuance as a trial balloon for a potential initial public offering in the coming years. Company disclosures look ample and are better than some of its emerging market peers. The big question with an IPO will be the valuation, with Saudi authorities reportedly looking at the $2 trillion level. This may be a challenge. But if the government wants part of the company to be publicly traded, and if it shows some flexibility around pricing levels, we may see a deal materialise.

Even at a lower valuation, an IPO would still likely lead to significant foreign-capital flows into Saudi government coffers. Ultimately, this would help authorities to progress on its Vision 2030.

Jan Berthold

Jan Berthold

Sovereign Analyst

Randy Cutler

Randy Cutler

Senior Credit Analyst