Following the 2008 Credit Crisis, numerous economies fell into the status of junk bond risk for their sovereign debts, leading to one of many bailouts that followed the financial collapse. In particular, one group of nations (Portugal, Iceland, Ireland, Greece, and Spain) were singled at as the poster children for the collapse of the debt bubble in Europe, and because euphemistically known as the PIIGS.
However, a touch over seven years later, Saudi Arabia can now be added to that group as on Jan. 12, the Kingdom’s sovereign debt was downgraded to the same levels as the PIIGS nations were, making them a non-European addition that also replaces Iceland who was the only country able to leave the crisis when they chose to default on their onerous debt, and jail the bankers who created it.
Ever since the Saudi’s commenced a gambit to drive down oil prices in early 2015, the consequences have reverberated back to them in both their budgets, and their economy. And in reaction to this, the oil producing nation has had to issue billions in sovereign bonds to make up for the shortfall, and even put up for IPO their most prized corporate jewel.
Investors intending to take out insurance on Saudi Arabian bonds would have to pay as much as they do with troubled Portugal. The price of insuring Riyadh’s debt has more than doubled in the past 12 months as oil prices continue to collapse, Bloomberg reports.
With crude prices at 12-year lows, the Kingdom continues to bankroll a war in Yemen. Last year, Saudi Arabia sold bonds for the first time since 2007 to cover the budget deficit.
The country’s net foreign assets dropped to $627 billion in 10 consecutive months through November. This was the longest losing streak since 2006.
“They have huge reserves and extremely low debt, but the question is, how long are oil prices going to stay at this level?” Anthony Simond, an investment manager at London-based Aberdeen Asset Management told Bloomberg. – Russia Today
To date, the only real loser in the collapse of oil prices has been Saudi Arabia, who relies too much on oil exports for their overall economy, and has few other producing industries to make up for the difference when petroleum prices fall.
Most analysts are predicting that oil prices have much further down to go before stabilizing due to the industrial recession that is occurring worldwide, and the deflationary environment that is affecting all commodities. And while the Kingdom still has much U.S. support due to the 44 year petro-dollar agreement that links both nations to the reserve currency, it is only a matter of time before the rest of their economy collapses due to their rising debt, and financial instability.