Saudi Arabia has displaced China as the most prolific issuer of international debt among emerging markets, breaking Beijing’s 12-year run at the top.

Data for new-bond sales by both governments and corporates this year reveal the kingdom is borrowing at a record pace as global debt investors begin to back Crown Prince’s Mohammed bin Salman’s Vision 2030 plan. Chinese borrowers, on the other hand, are witnessing a buying frenzy in local-currency bonds and have slowed international issuance to one of the slowest paces in recent years.

Overtaking China is meaningful for Saudi Arabia - which has 1/16th of the Asian nation’s the gross domestic product and the drive to become a global business hub by the end of the decade. The latest data suggest improving sentiment as Riyadh seeks funding for projects to diversify the economy from oil and position it as a link between Asia and Europe. Meanwhile, the rest of emerging markets are also witnessing a blockbuster year for bond issuance, amid falling borrowing costs and a hunt for juicy yields.

“Sentiment for Saudi bonds is very healthy,” said Apostolos Bantis, the Zurich-based managing director of fixed-income advisory at Union Bancaire Privee Ubp SA. “It’s not a surprise that the Kingdom has become the largest EM bond issuer given its large funding needs for large infrastructure projects.”

Bond sales from Saudi Arabian entities have increased 8% so far this year and exceeded $33 billion. The government accounts for more than half of this, including a $5 billion dollar-denominated sukuk deal last month.

The kingdom is working to find alternative sources of funding to help cover an expected fiscal shortfall of about $21 billion this year. It expects total funding activities for the year to reach about $37 billion, to help accelerate Vision 2030. In fact, the country has turned to the bond market on such a scale partly because foreign direct investment has fallen short of its targets, while oil revenue has been crimped by supply cuts.

The nation’s borrowing is already inviting caution from some money managers. Barclays Plc downgraded Saudi Arabia’s sovereign credit to underweight from market weight, citing “recurrent” bond issuance, lower oil prices and Middle East tensions.

“Saudi can not keep up the current bond issuance pace for too long as that would start to have an impact on its fundamentals and cost of funding,” said Bantis of UBP.

Overall, EM international bond sales have increased 28% from a year earlier to $291 billion, the highest for comparable periods since 2021. The extra yield investors demand to buy EM bonds - sovereign and corporate combined - rather than Treasuries is now about 266 basis points, below the five-year average of 336 basis points, according to a Bloomberg index.

Meanwhile, China Development Bank in Beijing and Chinese companies have together sold $23.3 billion of dollar- and euro-denominated bonds this year. That’s a 68% drop from the country’s average government and corporate-bond sales for this time for the year since 2019. China now accounts for only 8.1% of emerging-market borrowing, a far cry from 2017 when it accounted for one third of all issuances with a $224 billion spree.

Unlike the trend in dollar bonds, the country is witnessing unprecedented bond issuance in local-currency debt as borrowing costs tumble to record low.

  - Bloomberg