The horizon is not so far as we can see, but as far as we can imagine

Saudi Arabian Debt Will Not Be Among Safest in World

Saudi Arabia is issuing 5, 10 and 30 year bonds.

The debt will be among the most secure in the world given the country’s strong balance sheet, net foreign assets, and ~$13 trillion worth of proven oil reserves.

On Wednesday, Saudi Arabia is set to issue its first wave of sovereign debt to foreign investors. The measure, first announced last November, is being offered in response to a historically severe compression and enduring slump in oil prices that has squeezed the nation’s fiscal budget. Accessing the debt markets can help mitigate short-term fiscal pressure and provide financing during a necessary bridge period to a more diversified economy.

Well, the five and ten years are safe enough.

Saudi Arabia’s problems are both inevitable, and caused by the new generation of leadership’s stupidity. Remember, Saudi Arabia, seeking to destroy the US fracking industry, is the one who broke the back of oil prices in the first place.

That said, the prices had nowhere to go but down anyway. The world is in a wave of austerity and options which avoid the use of oil are coming online. Somewhere in the early 2020s, electrical cars will be as cheap as gasoline cars.

Game over.

As for the bonds, Saudi Arabia isn’t going to “bridge to a more diversified economy.” Not going to happen. They simply import too much, and do not have enough domestic producers capable of replacing imports and creating new work. Nor are those conditions easy for them to create when their currency value is almost entirely based on vast volumes of resources, which means it isn’t providing the necessary feedback (low, low) to make production in the country viable.

Saudi Arabians have a joke: “My grandfather rode a camel, I drive a Mercedes. My grandson will ride a camel.”

Correct, in essence.

On the bright side, once they’re broke, the money flooding out to promote their particular take on Islam will subside to a dribble.

I expect economic collapse and civil war in Saudi Arabia. Within 20 years.

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  1. Hugh

    Saudi Arabia is a powder keg. We all know it is going to blow. We just don’t know when. I would say 5 year bonds are 90% safe, the ten year ones, 50%, and I would not go near the 30 year stuff. The whole rationale for issuing debt is that the Saudis are having cash flow problems now but there will be a future turnaround in oil prices that will straighten out their finances. Aside from oil and some oil related products, Saudi Arabia’s only other significant exports have been Wahabism and terrorism.

    The KSA is an intensely unstable monstrosity only held together by lots and lots of money. Cash flow problems for them are not some accounting inconvenience. They are existential.

    The KSA is a corrupt monarchy on top of an absolute dictatorship on top of a populace indoctrinated in an extremist, xenophobic religious ideology all based on a diminishing pool of oil whose price has tanked. The Saudi royal family currently consists of around fifteen thousand leeches siphoning off tens of billions of the nation’s wealth each year to maintain their lifestyles. You can consider this money a dead loss to the national economy. At the same time, it is a major source of funding for foreign terrorists.

    The current population of Saudia Arabis is around 32 million. It is a fairly young population. Even so if you use the rule of thumb that a nation’s labor force is about half its population, you would expect the country’s labor force to be about 16 million. But here’s the kicker, most women are excluded from the labor force and most men do not work. Manual labor is disdained and seen as either unclean or low class. This explains why 90% or so of workers in the KSA are foreigners, well that and that foreigners from Third World countries like India and Nepal can be underpaid and mightily abused. Nor is the story different in the oil industry where the percentage of foreign workers is even higher.

    Saudi Arabia is a poster child for a completely artificial and unsustainable nation-state. Instead of addressing any of its problems or providing real foundations to its economy, its current monarchy is engaged in a bloody, destabilizing war in Yemen, a country with a population almost as large as its own and in an even crazier competition with Shia Iran, its larger and more diverse and diversified neighbor. It is a time bomb, and ticks are not only getting louder. They are coming faster.

  2. It will be interesting to see if your correct. remember that totalitarian and authoritarian states last longer than you think they will, and fall faster when nothing seems out of the ordinary. Think USSR, or Nicaragua. I predict that Saudi Arabia will be the same way, and fall when we least expect it. Not in terms of time, but when the debt looks sustainable, and some debt holder thinks it is time to extract slightly more. But more will not be available, only the rest of us will not know that. In other words the debt will be hidden from everyone on the outside.

    I just posted the second Debussy post on Julia:

  3. S Brennan

    I agree Ian;

    But weren’t bondholders bailed out in 2009…when they should have been given haircuts? Is this just a mechanism to give US tax dollars to the house of Saud for helping turn this world into a deeper hellhole?

  4. different clue

    A civil war in Saudi Arabia would be most unfortunate. The thousands of Saudi Family members would flee the country and try to send out or wire out all the money they had not yet already pre-deployed beyond the borders of KSA. The massed millions would be left to wage the civil war over the oil and the physical infrastructure.

    The best outcome would be for the Shia Eastern Province ( where the oil is) to successfully eject Sunni Arabian rule and military presence and find a way to put themselves and their land ( and the oil under it) under the protection of Shia Iraq and Iran. The worst outcome would be for the Wahhabis and al Qaeda to take direct command of the oil fields and the infrastructure. They would hope to spend the oil money on a more sincere version of spreading Wahhabi-ism and Qaeda-ism than the present Saudi version of those projects. And if they discovered they could no longer sell any oil to a world which will have moved beyond oil by that time, then they will set fire to all the oil fields in a bid to fill the atmosphere with enough CO2 to heat the global enough to reach Runaway Condition Venus. Such would be the nature of their hateful spite upon conquering all that oil and having nowhere to sell it.

  5. Billy Smith

    You also need to take into account that the Saudi Arabian aquifers have dried up.

    Saudi Arabia was one of the biggest exporters of wheat in the Middle East, but over-use of the aquifers has meant that they’ve drained enough water that it will take another 1500 years of rainfall to fill them back up again.

    Next years wheat harvest will fail due to drought.

    This was the situation that Syria found itself in approximately 5-10 years ago. If they had brought in a balanced and equitable way of using the water, then the farmers wouldn’t have ended up migrating to the cities, and the civil war that’s currently going on would have run very differently.

    If they had spent the oil revenues on creating an effective solar-based desalination system, and an irrigation network, then they wouldn’t be needing to go to war with Yemen right now.

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