It’s Just Not Saudi Arabia’s Year: First Oil Prices, Now This…
Last week, in the latest sign of Saudi Arabia’s deteriorating financial condition, S&P downgraded the kingdom to AA- negative citing “lower for longer” crude and the attendant ballooning fiscal deficit.
To be sure, we’ve covered the story extensively and it was almost exactly one year ago that we flagged the quiet death of the petrodollar and explained the significance to a market that hadn’t yet woken up to just what it means when, thanks to plunging crude prices, producing nations cease to be net exporters of capital.
With more than $650 billion in SAMA reserves, Riyadh does have a sizeable cushion. However, there are a number of factors (in addition to low oil prices) that are weighing heavily including, i) financing the war in Yemen, ii) maintaining the lifestyle of everyday Saudis, and iii) preserving the riyal peg. Here’s a look at the breakdown of government expenditures:
When you mix heavy outlays with declining revenue, it means dipping into the warchest…
Here’s a bit of color from Deutsche Bank which helps to explain what we mean by “the cost of preserving the societal status quo”:
The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit. However, this is a highly unlikely scenario given the demographic differential between KSA and UAE and the socio-economic impact that such an outcome (blended prices rising from USD0.11/l to USD0.5/l) could have within the country.
The Saudi government could look to increase electricity tariffs. This would be a challenge for residential consumption (51% of aggregate consumption) given the political/social impact, though it would present the highest incremental revenue benefit.
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