NextFin News - Saudi Arabia returned to international debt markets on Tuesday with a two-tranche dollar sukuk offering, as the kingdom steps up borrowing to cushion its economy from the fallout of the Iran war. The order book for the five- and 10-year Islamic-bond sale stood at more than $9 billion excluding lead managers' interest, according to a person familiar with the matter.
The sale is the kingdom's second international dollar offering in eight months, following an $11.5 billion four-part bond sale in January that drew more than $29 billion of bids at its peak. It arrives against a fiscal backdrop in which the 2026 budget deficit is forecast at $44 billion and public debt is projected to reach about 1.5 trillion riyals — 31.7% of GDP — by the end of 2025, up from 1.2 trillion riyals in 2024.
The central question is not whether Saudi Arabia can sell debt. It can. The question is what the price of that debt says about how long the market expects the war to weigh on the region.
The Deal Repeats a Proven Playbook
The kingdom is offering two benchmark-sized tranches of dollar-denominated sukuk with five- and 10-year maturities. The structure is a near-exact repeat of the September 2025 sale, when Saudi Arabia placed $5.5 billion of international sukuk: a $2.25 billion five-year note priced at 65 basis points over U.S. Treasuries and a $3.25 billion 10-year tranche at 75 basis points. That transaction helped put the kingdom on course for a record year of issuance as it continued to fund Crown Prince Mohammed bin Salman's economic-diversification program.
The order book of more than $9 billion, excluding lead managers' interest, points to an oversubscription ratio of roughly three to four times if the final size lands near benchmark scale. That level of demand, coming eight months after the January sale and in the middle of an active regional war, tells investors two things at once: Saudi credit still clears easily, and the kingdom has no intention of slowing its issuance calendar while the war drags on.
The January sale is the relevant anchor. Saudi Arabia raised $11.5 billion through a four-part dollar offering priced on January 5, with maturities ranging from three to 30 years. The deal attracted more than $29 billion of orders at its peak before settling just under $28 billion, according to a person with direct knowledge of the matter. Demand was strongest at the long end: the 30-year tranche drew more than $8.1 billion of orders, the 10-year more than $7.9 billion, the five-year more than $6.5 billion, and the three-year more than $5.2 billion. The longest part of that deal, a $3.5 billion bond maturing in 2056, priced at 1.1 percentage points above Treasuries.
Why Borrow Now: War, Oil Cuts, and a Deficit That Keeps Growing
The immediate driver is fiscal, and the numbers are no longer close. Saudi Arabia approved its 2026 budget in December forecasting a deficit of $44 billion, as it shifts spending toward priority sectors such as industry and logistics to raise non-oil revenue. The finance ministry said the 2025 shortfall is expected to more than double the budgeted target of 101 billion riyals, reaching 5.3% of GDP, up from an initial target of 2.3%. Public debt is expected to climb to approximately 1.5 trillion riyals by the end of 2025 — about 31.7% of GDP — from 1.2 trillion riyals in 2024.
That arithmetic matters because it shows the deficit is not a one-off war expense. It is the combination of three forces: lower oil revenue, sustained Vision 2030 spending, and now conflict-related costs. The kingdom's voluntary cut of one million barrels per day — first added to the broader OPEC+ supply-limiting deal in April 2023 — weighed on oil revenue even before the regional conflict intensified. Brent averaged $82.2 a barrel in 2023, down from $99.0 in 2022, and the fiscal pressure has compounded since.
The Iran war adds a second layer: it raises the cost of capital for the entire region. S&P Global Ratings expects the global Islamic finance industry to slow in 2026, and its head of Islamic finance framed the mechanism plainly:
We expect the growth of the global Islamic finance industry to slow in 2026, to about 5%-10%, as a result of the Middle East war, following an expansion of 10.2% in 2025.
Mohamed Damak, head of Islamic finance at S&P Global Ratings, said that in the firm's latest Islamic finance report. Yet Saudi Arabia is borrowing anyway — a signal that the kingdom views the war's economic drag as a multi-year headwind rather than a passing shock.
There is a third force that rarely gets its due: the riyal's peg to the dollar. The currency has been fixed at 3.75 riyals to the dollar since 1986. The peg removes exchange-rate risk for dollar-bond investors and keeps Saudi borrowing costs tied directly to U.S. rates. But it also means the kingdom cannot devalue its way out of a fiscal squeeze, and it imports the Federal Reserve's policy stance even when that stance does not fit the domestic cycle. In a higher-for-longer U.S. rate environment, every new dollar issue carries a structurally higher coupon than the debt issued in the zero-rate era.
The Mechanism: How a Saudi Sale Sets the Price of Risk for the Whole Gulf
The first-order effect of this offering is straightforward: Saudi Arabia raises cash to fund its deficit. The second-order effect is what actually matters for investors outside the kingdom. Saudi Arabia is the largest sovereign issuer in the Gulf and the anchor credit for the region. When it prices a benchmark deal, it sets the reference spread that every other Gulf borrower — from the UAE and Qatar to sovereign-backed corporates — must work around. A tight Saudi print pulls the whole curve tighter; a wide one forces everyone to reprice.
The transmission channel runs through three gates. First, the spread over Treasuries: if the five- and 10-year tranches price within about 10 basis points of the September 2025 levels of 65 and 75 basis points, the market is signaling that the war premium is contained. Second, the order-book-to-size ratio: sustained three-to-four-times oversubscription says global allocation desks are still underweight the region and need to buy. Third, the long end: whether the 10-year can clear at a spread that does not blow out relative to the five-year. A steepening curve would mean investors are charging more for duration risk, not just Saudi-specific risk.
That is why the deal is being watched beyond the Middle East. Saudi Arabia was the largest dollar-debt issuer among emerging markets excluding China in 2025, with an 18% share, according to Fitch Ratings. A smoothly placed Saudi offering reinforces the asset class; a difficult one would ripple through every emerging-market sovereign that plans to tap markets before year-end.
Domestically, the sukuk market has also deepened enough to absorb a large share of government funding without relying solely on overseas investors. Sukuk issuance across Gulf Cooperation Council countries rose 13.1% in the first four months of 2026, driven by strong local-currency borrowing in Saudi Arabia, according to regional market data. That gives the kingdom a second channel — the riyal market — to manage its maturity profile and reduce its exposure to global risk-off episodes.
The Bull Case: Still One of the Least Indebted Sovereigns
At 31.7% debt-to-GDP, Saudi Arabia remains one of the least indebted investment-grade sovereigns in the world. That is the foundation of the credit story: even after the projected rise in debt, the kingdom's balance sheet has far more headroom than most peers, and its sovereign wealth reserves and oil assets provide a deep backstop. S&P Global Ratings upgraded Saudi Arabia from A- to A+ in September 2024 — a two-notch jump that bypassed the A level entirely — reflecting the agency's view that non-oil revenue diversification, fiscal-reform execution, and Public Investment Fund asset accumulation had structurally strengthened the sovereign profile beyond the pre-2016 oil-dependent model.
The economic transformation is visible in the growth mix. Real GDP accelerated from 2.7% in fiscal 2024 to an estimated 4.4% in fiscal 2025, driven mainly by non-oil activity, according to the finance ministry's budget statement. The non-oil sector accounted for 55.6% of real GDP in the first half of 2025, up from 45.4% in 2016. Total government revenues are projected to reach SAR1,147 billion in 2026, a 5.1% year-on-year increase, with non-oil tax revenue budgeted to rise 5%.
That diversification is not just narrative. It is the mechanism that lets Saudi Arabia run a deficit without triggering a credit event: as long as non-oil revenue keeps growing, the kingdom is not wholly hostage to the oil price, and lenders can underwrite the debt on the strength of a broader tax base.
The Counter-Thesis: This Time the Shock Could Be Structural
The strongest argument against reading this as routine deficit financing is that the war could turn a cyclical oil downturn into a structural fiscal shift. If the conflict disrupts oil infrastructure, keeps regional risk premiums elevated for years, or forces a sustained increase in defense and security spending, Saudi Arabia's borrowing needs could outlast the current budget cycle. S&P's warning that sukuk growth will slow to 5%–10% in 2026 reflects exactly that concern: the Middle East war is not just a line item, it is a drag on the entire Islamic-finance ecosystem that Saudi Arabia leads.
The counter-case has teeth because the kingdom has already burned through fiscal buffers faster than expected. The 2025 deficit is tracking at more than double the budgeted target — 5.3% of GDP versus 2.3% — which means the government's own forecasts have repeatedly underestimated the shortfall. A sovereign that misses its deficit targets by that margin loses the benefit of the doubt on forward guidance.
Even so, the structural counter-thesis does not yet break the credit story. Debt at 31.7% of GDP leaves room for several more years of deficit spending before leverage approaches levels that would alarm investors. The falsifying signal is specific: if Saudi Arabia's debt-to-GDP ratio crosses 45% while the deficit remains above 4% of GDP for two consecutive years, the "ample headroom" thesis is wrong and the market will start pricing a structural repricing of Gulf sovereign risk. That threshold is not arbitrary — it is roughly where several regional peers began to see their borrowing costs detach from oil fundamentals and trade on leverage concerns.
What to Watch: Three Horizons
Short term: the final pricing of the five- and 10-year tranches relative to the September 2025 levels of 65 and 75 basis points over Treasuries. A print within 10 basis points of those levels would confirm demand is intact; a wider print would signal the war premium is finally being charged. Also watch the order book's composition — whether Asian investors, who drove much of the January demand, are still participating.
Medium term: the 2026 budget execution. The $44 billion deficit forecast assumes an oil-price recovery and tight spending control. If the deficit runs wider than budgeted for a second straight year, the kingdom will face pressure to issue more frequently, which would test market appetite. Non-oil revenue growth of 5% in 2026 is the key test of whether diversification is actually reducing fiscal dependence on crude.
Long term: whether the kingdom can keep debt below the 45% of GDP threshold while funding Vision 2030's megaprojects. The debt-to-GDP ratio, tracked against the deficit as a share of GDP, is the single metric that separates a cyclical borrowing program from a structural shift.
The base case is that Saudi Arabia prices the deal near prior levels and the Gulf sovereign curve holds steady. The downside case is that escalation in the Iran war pushes spreads wider and forces a repricing across GCC credit. The upside case is that a smoothly placed offering restores investor confidence and opens the door for more regional issuance before year-end.
Saudi Arabia is not borrowing because it is running out of money. It is borrowing because the war has turned its fiscal math from an oil-price problem into a risk-premium problem — and the market's answer to that question will set the cost of capital for the entire Gulf for years to come.
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