Saudi Arabia – which was busy playing headline hockey with Russia over a rumored 5% production cut proposal – is running out of money.
Yes, we know, that sounds absurd. But believe it or not, the country whose monarch recently rented the entire Four Seasons hotel for a 48 hour stay in Washington DC, is in fact going broke. And at a fairly rapid clip.
The problem: slumping crude. As we first discussed in November of 2014, Riyadh’s move to kill the fabled petrodollar in an effort to bankrupt the US shale complex was a risky proposition. If ZIRP kept US producers in the game longer than the Saudis anticipated, crashing crude could end up blowing a hole in the kingdom’s budget – especially if Iranian supply came back on line and added to the supply glut.
Fast forward a 14 months and that’s exactly what’s happened. US production is down but not wholly out (yet) and the Iranians are adding 500,000 barrels per day in output in Q1 and 100,000,000 per day by the end of the year.
Compounding the problem is the war in Yemen (which will enter its second year this March) and the cost of providing subsidies for everyday Saudis.
All of this has conspired to leave Riyadh with a budget deficit of 16%. That’s expected to narrow in 2016 but at 13%, will still be quite large. Make no mistake, if crude continues to sell for between $30 and $35 per barrel, 13% will probably prove to be a rather conservative estimate.
“This is a quantum leap in all aspects,” Abdullatif al-Othman, governor of the Saudi Arabian General Investment Authority, told a conference convened this week to study ways for the kingdom to cut spending and shore up the budget. Here’s Reuters:
Stakes in the operations of big state companies, including national oil giant Saudi Aramco, would be sold off; underused assets owned by the government, such as vast land holdings and mineral deposits, would be made available for development.
Parts of the government itself, including some areas of the national health care system, would be converted into independent commercial companies to improve efficiency and reduce the financial burden on the state. The number of privately run schools would rise to around 25 percent from 14 percent.
Meanwhile, the government would use its massive financial resources to help diversify the economy beyond oil into sectors such as shipbuilding, information technology and tourism, by awarding contracts to new firms and providing finance.
Fadl al-Boainain, a prominent Saudi private-sector economist who attended the conference, said he welcomed officials’ emphasis on developing parts of the economy that had long been neglected because of the focus on oil.
But he added: “The overall economic situation does not support the great optimism that ministers expressed, and it does not support the indicators they referred to.
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