Over the weekend, just as Gulf state stocks were in full-on meltdown mode, we outlined Saudi Arabia’s increasingly precarious financial situation. The problem - which is at least partially of the kingdom’s own making - can be visualized as follows:
As you can see, Saudi Arabia is staring down a fiscal deficit on the order of some 20% of GDP while the country faces its first current account deficit in over a decade.
The culprit, of course, is persistently low crude prices for which Saudi Arabia can partially blame itself. As we’re fond of putting it, the country has "Plaxico’d" both itself and the petrodollar in an epic quest to bankrupt the US shale space, an effort which has been complicated by US drillers’ access to capital markets which are of course quite forgiving thanks to years of ZIRP.
Now, with declining crude revenues clashing head on with the cost of simultaneously financing the state while intervening militarily in Yemen, the Saudis are looking to tap the bond market (a move which could increase debt-to-GDP by a factor of 10 by the end of next year) and some are speculating that the riyal’s dollar peg could ultimately prove unsustainable.
So that is the backdrop and as Bloomberg reports, it's forcing the Saudis to consider ways to cut the critical 2016 budget. Here's the story:
Saudi Arabia is seeking to cut billions of dollars from next year’s budget because of the slump in crude prices, according to two people familiar with the matter.
The government is working with advisers on a review of capital spending plans and may delay or shrink some infrastructure projects to save money, the people said, asking not to be identified as the information is private. The government is in the early stages of the review and could look at cutting investment spending, estimated to be about 382 billion riyals ($102 billion) this year, by about 10 percent or more, the people said. Current spending on areas such as public sector salaries wouldn’t be affected, the people said.
The Arab world’s largest economy is expected to post a budget deficit of almost 20 percent of gross domestic product this year, according to the International Monetary Fund. With income from oil accounting for about 90 percent of revenue, a more than 50 percent drop in prices in the past 12 months has put pressure on the nation’s finances. The country has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007.
Capital investment accounts for less than half the government’s outgoings, with current spending estimated at 854 billion riyals, according to a report issued by Samba Financial Group on Aug. 18. Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said this month. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”
The Ministry of Finance declined to comment.
So while we're not sure if the Saudis are open to taking advice from outside their circle of "advisers", we offer the following observations free of charge:
- deliberately undermining a system that has worked to your benefit for years (and helped create a vast store of FX reserves) in a spiteful attempt to undercut high cost producers an ocean away might not have been the best idea
- using crude prices to achieve "ancillary diplomatic benefits" (to quote The New York Times) like forcing the Kremlin to give up Assad, is now costing a whole lot of money
- getting involved in regional proxy wars is expensive
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Bonus: this is what a dual deficit problem looks like