Saudi credit default swaps drop after oil market rebound

Saudi credit default swaps (CDS) have fallen over the last few days following a rebound in oil prices last week; a rally which ended on Monday.

Brent crude jumped $2.49 at $50.05 per barrel (bbl) on Friday and also gained ten percent for the week.

The rebound has left Saudi credit default swaps quoted at 84 basis points (bps), which is about 30 bps below the Philippines' current level and 14 bps below Spain. Saudi Arabia has not, however, returned to the area of South Korea, at 65 bps.

Last Monday, Reuters reported that five-year Saudi CDS had soared as high as 120 bps, from around 60 bps late last month. Higher CDS implies the kingdom, the world’s top oil exporter, had a probability of sovereign default in the next five years of close to ten percent, a sign that the drop in oil prices has shaken investor confidence in the oil-dependent economy.

The kingdom has huge fiscal reserves which it had accumulated during the years of high oil prices. Some analysts believe these will act as a buffer against further oil revenue declines. With oil at $50/bbl, the kingdom is projected to run a budget deficit of 15-20 percent of gross domestic product (GDP), according to analysts polled by Reuters.

One-year US dollar/Saudi riyal forwards were last quoted at 300 points, not far from last week's 12-year highs, reflecting a significant demand to hedge against the risk of riyal depreciation due to low oil prices.