In one of the most over-subscribed issues in history, Saudi Arabia’s state-owned energy giant, Saudi Aramco, has sold $12 billion of bonds, with investors from around the globe flocking to participate.

The sale was so large it lowered the country’s entire borrowing cost at a single stroke. It could also inject new financial life into the Kingdom’s stalled economic reform program, Vision 2030.

By issuing bonds, a form of debt, rather than shares, which grant purchasers ownership, the Saudi authorities have retained complete control of the company.

However control comes at a price, as the bond sale also brings the spotlight back to a growing area of concern throughout the Gulf Cooperation Council: rising debt.

“Debt is piling up,” said Rory Fyfe, managing director with consultancy MENA-Advisors. “After oil prices collapsed in 2014, debt issuance in the GCC increased sharply to offset the loss in income and maintain counter-cyclical expenditure. As a result, public debt in the GCC has since almost tripled,” he told Asia Times.

The GCC’s public debt went from around $150 billion in 2014 to $429 billion by 2018, according to MENA Associates figures. Analysts are increasingly worried about the sustainability of this trend, particularly if oil prices begin to falter in the year ahead.

“This year’s [Saudi] budget was premised on an oil price of $80 per barrel,” said Capital Economics Senior Emerging Markets Economist, Jason Tuvey. Yet, despite 30-40% hikes in prices since the start of the year, oil now trades around $10 below that projected level – and there may be even lower prices to come.

Leveraging Aramco

Saudi Aramco, possibly the world’s most lucrative enterprise, made a profit of $111 billion in 2018.

This was roughly equivalent to the entire GDP of Morocco, while profits in 2017 were enough to provide the Saudi government with nearly two-thirds of its entire revenue, according to the Financial Times. Profits come from the company’s monopoly on oil in Saudi Arabia, which has the world’s second-largest proven oil reserves, after Venezuela.

The funds raised by the bond sale are widely expected to help Aramco purchase a majority stake in SABIC, the Saudi state petrochemical company. This would help boost Aramco’s value ahead of a future initial public offering (IPO) – something the Saudi authorities have been promising since 2016.

This SABIC stake would be bought from its current holder, the Saudi sovereign wealth fund PIF, which is likely to use the money to fund the Kingdom’s ambitious economic diversification strategy, Vision 2030.

“The bond sale is essentially leveraging Aramco’s strong balance sheet to provide funds for government investment plans,” says Fyfe.

The investment plan is spearheaded by the controversial Saudi crown prince and de facto ruler, Mohammed bin Salman. Vision 2030 includes grandiose projects, such a $500 billion new city, NEOM, located on the border with Jordan and Egypt, and the ongoing construction of Jeddah Tower, set to be the world’s tallest at 1 kilometer.

The Vision also targets a radical shake-up of the Kingdom’s ways of doing business, encouraging the non-oil and gas and private sectors to take up a greater share of economic activity.

Blurred Vision

Since its announcement in 2016, however, the Vision has become blurred, with the Saudi economy slowing after oil prices took a tumble in 2014 from which they have yet to fully recover.

Now, in Saudi Arabia and throughout the GCC, “debt levels are far higher, foreign exchange reserves are lower,” said Fyfe. In addition to these economic troubles, political unity has been undermined by the Saudi-led boycott of Qatar, now in its 20th month, as well as an increased number of Arab countries relying on GCC largesse to maintain stability.

Economic troubles in the region saw Saudi Arabia, the UAE and Kuwait help Jordan with $2.5 billion in assistance in June 2018, then Bahrain with $10 billion in October. Lebanon has also received $500 million from Qatar this year, while Saudi Arabia is expected to provide a further $3 billion in aid.

The needs of the region come at a time when the Saudi economy looks set to slow sharply, according to Tuvey, “as the Kingdom bears the brunt of OPEC’s oil production cuts.”

To keep oil prices high, Saudi Arabia and other members of the Organisation of Petroleum Exporting Countries (OPEC), plus Russia, agreed to cut production at the end of last year. This, along with the US embargo against major oil producer Venezuela and sanctions against Iran, has decreased global supply, pushing up prices.

Yet production cuts are double-edged, as they also mean GCC oil producers now sell less oil, which reduces their total revenues. Thus far, the price increases are outweighing the drop in output, but that may not be the case for much longer.

“Global growth remains weak,” said Tuvey, so “oil prices are likely to fall… We expect that benchmark Brent crude will drop from $71 per barrel now to $50 per barrel by the end of 2019.”

While Saudi Arabia still has enormous reserves to fall back on, and “should be fine with oil prices above $50,” according to Fyfe, “oil prices below this level could lead to spending cuts, higher taxes, currency devaluation and concerns about further debt issuance.”