The most profitable company in the world has drunk from the debt pool for the first time… and to great applause.
Saudi Aramco, titan of the oil market, finally gave into temptation and borrowed over £9 billion earlier this week.
Demand was so high for its debt that it borrowed at even lower interest rates than the Saudi Arabian government – an incredible accomplishment, considering it’s the Saudi Arabian government that runs it.
When companies raise money in this way by issuing bonds publicly to investors, they are required to publish a prospectus, detailing the status of the firm. It’s in here that the companies’ business operations, outlook, financial dealings and the risks investors face are listed.
Interestingly, one risk listed was the possibility that the Saudi Arabian government would stop pegging its currency (the riyal), to the US dollar. Such a move would have huge implications for Saudi Arabia’s relationship with the US, which is itself a fulcrum on which the world order we live in today rests.
To break the peg would mean to question economic, financial, and military agreements that have stood in stone between the two countries for decades.
The US, formerly the kingdom’s biggest oil customer, is now its biggest competitor, thanks to innovations in shale oil and interest rates low enough to finance its extraction. The Saudis escalating flirtation with China, Russia and nuclear energy indicate they have a very different view of the horizon than their former ally. What (brave) new world order do they see coming?
I’ll have to ask James Allen, our energy specialist about that when he gets in. He’s been looking into the shale oil companies over in Texas, with some interesting insights. While Aramco has just arrived for a pint of debt, the Texans have been drinking since noon and they’re absolutely hammered…
But the poignancy of the world’s most profitable company unable to resist the debt trough stood out to me. Is this what the central banks really wanted when they lowered interest rates to thousand-year lows? The most cost-effective operation in the world pulling profit from the future, at cost, to spend today?
And yet their ambition to generate inflation still eludes them, especially (ironically) in areas where their actions are the most extreme. Just yesterday the Super Mario over at the European Central Bank (ECB), upon keeping interest rates negative, tried to summon some more of his “whatever it takes” charisma, claiming that should the eurozone economy deteriorate: “We’re ready to use all instruments. All instruments.”
Demand for credit and mortgages by eurozone consumers has been falling steadily since 2015 and 2016 respectively. The ECB has taken a horse to ever larger bodies of water, but it can’t make it drink. A large camel from Arabia has now shown up for a swig – but he isn’t even thirsty.
The International Monetary Fund meanwhile has declared that certain horses (governments) need to resist the debt trough and reduce fiscal spending (good luck). It has one exception however: Germany, which it has declared should be spending more. You really can’t please everyone these days.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates