Concern about Saudi Arabia’s ability to cope with low oil prices pushed the cost of insuring its sovereign debt against default on Tuesday to its highest level since June 2009, when the global financial crisis was raging.
Five-year credit default swaps edged up to 154.2 points on Tuesday, from 84 points in mid-September, according to Markit data.
This week CDS have risen above a January 2012 peak of 147 points, hit in the wake of the Arab Spring uprisings of 2011, which to some investors appeared to pose a serious political threat to the world’s top oil exporter.
Upward pressure on the CDS has been fuelled by Standard & Poor’s decision on Friday to cut its ratings for Saudi Arabia’s long-term foreign and local currency sovereign credit by one notch to ‘A-plus/A-1′, citing a “pronounced negative swing” in the government’s budget balance.
On Tuesday came news that the seasonally adjusted Emirates NBD Saudi Arabia Purchasing Managers’ Index, which measures growth in the non-oil private sector, dropped to 55.7 in October – its lowest level since the survey was launched in August 2009. However, the index remained above the 50-point mark that separates growth from contraction.
The kingdom’s central bank, which serves as its sovereign wealth fund, has burned through $90 billion of foreign assets since August 2014 as it raises money to cover a budget deficit expected to exceed $100 billion this year.
It still has $647 billion, but state spending cuts to curb the decline could hurt the economy and prove politically difficult in the long run.
The latest CDS price implies a chance of Saudi Arabia defaulting over the next five years of 10.27 percent, according to Thomson Reuters data.
The CDS market indicates that Saudi Arabia is seen as more likely to default than the Philippines, whose CDS are at 102.63 points. However, Saudi CDS are still far below their peak in the global financial crisis – 333 points in February 2009.