With oil prices continuing to languish below $50 per barrel, the major oil producers in the Middle East are seeing their financial positions deteriorate. To plug the gap in the government budgets, the Gulf States are having to turn to the international bond markets.

Saudi Arabia plans on taking out $10 billion to $15 billion in debt from international financial markets, but a controversial piece of legislation passed by the U.S. Congress could complicate Saudi Arabia’s plans. Congress passed a bill that would allow the victims of the September 11, 2001 attacks to sue Saudi Arabia for its potential involvement. President Obama opposes the legislation for fear of damaging America’s relationship with Saudi Arabia, but the U.S. Senate, with huge levels of support, overrode the president’s veto.

The issue is rattling confidence in a crucial strategic and economic alliance between the U.S. and Saudi Arabia. Riyadh has threatened to sell off U.S. treasuries if the bill moves forward. As the veto override vote has worked its way through the Senate, Saudi Arabia’s currency plunged to its lowest level in four months, and its stock market “lost the most in the world for a second straight day,” Bloomberg reported. Bloomberg follows 90 stock indices, and Saudi Arabia’s Tadawal All Share Index was the worst performer in recent days, falling to its lowest point since the beginning of this year (a time when oil prices dropped to below $30 per barrel). This could complicate or delay Saudi Arabia’s bond sale, sources told Bloomberg.

The 9/11 bill could interrupt Saudi Arabia’s plans for a bond offering, but it probably won’t derail the effort. The potential rift between the Washington and Riyadh probably won’t be a deal-breaker for Saudi Arabia’s plans for new debt issuance. “It is simply a matter of when, not if, Saudi Arabia decides to tap the international debt capital markets," Chavan Bhogaita, head of market insight and strategy at National Bank of Abu Dhabi PJSC, told Bloomberg. “This doesn’t change the fact that Saudi Arabia needs to raise a substantial amount of cash through the bond markets.” Related: The Inevitable Winners Of The OPEC Meeting

The 9/11 bill is likely more of a political than an economic headache, but it comes on top of Saudi Arabia’s worrying financial troubles. Its fiscal deficit reached 16 percent of GDP in 2015, the worst figure among the world’s top 20 economies. And despite austerity measures, the gap will only narrow to 13.5 percent of GDP this year. The financial squeeze has already forced Saudi Arabia to burn through roughly $150 billion in financial reserves since 2014. In May, Moody’s Investors Service downgraded Saudi debt to A1, two levels below Abu Dhabi and Qatar. The oil kingdom can continue to use up reserves for a few years, but with the oil markets heading on a “lower for longer” trajectory once again, Riyadh is starting to get a bit nervous.

The Saudi government is in the midst of a major economic transformation plan, introducing new taxes and cutting public spending in an effort to correct the fiscal imbalance. The IMF applauded the reforms last month, suggesting the country’s financial position was improving. But persistently low oil prices means the squeeze continues. A few days ago the government cut ministers’ salaries by 20 percent. Related: BP Faces Another Setback In Plans To Drill Pristine Australian Coast

In a sign of how acute the economic problems have become for Saudi Arabia, it appears that the Saudis have been the most aggressive in pushing for a production freeze between OPEC and Russia in Algiers this week. Over the past two years, more financially-strapped countries such as Venezuela and Iran have been the ones eager for market intervention to boost oil prices, while the Saudis have been content to let the market sort everything out, pushing high-cost producers out of business. But the tables have turned, as Javier Blas of Bloomberg noted this week. Now, Iran, fresh off of international sanctions and a huge increase in oil production, sees no need to limit its output. Saudi Arabia, on the other hand, has floated several proposals, a sign of how eager it is to see oil prices rebound.

Whether or not oil prices do rebound in the short-term, the need for more resources has Saudi Arabia turning to the bond markets for the first time, with a bond sale tentatively slated for October. It remains to be seen whether or not the 9/11 bill threatens the offering.

By Nick Cunningham of Oilprice.com

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