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We’ve spent quite a bit of time this year documenting Saudi Arabia’s fiscal bloodbath.
In the wake of the kingdom’s move to deliberately suppress crude prices in an effort to preserve market share by bankrupting the U.S. shale complex, Riyadh found itself in a tough spot. Thanks to ZIRP and the wide open capital markets it fosters, U.S. producers were able to stay afloat for longer than the Saudis likely expected.
Although the cracks are beginning to show (the U.S. has seen the most oil and gas bankruptcies since the crisis this quarter), the damage was done. Thanks to the fact that the monarchy needs to maintain the everyday Saudi’s standard of living (not to mention continue to feed the American MIC by spending billions on weapons) implementing budget cuts is a tall order, so when oil revenue collapses, the red ink piles up quickly.
By the summer, it was readily apparent that the Saudis were set to run a budget deficit on the order of 20 percent of GDP. That risked imperiling the country’s vast SAMA war chest and so, the Saudis tapped the debt markets to offset the reserve burn.
Here's a look at deficit forecasts from Deutsche Bank...
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...and here's a bit of color on the relationship between reserves and crude prices from BofAML.
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Maintenance of the riyal peg - which the market pretty clearly thinks may fall - only adds to the pressure.
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On Monday, we got the official numbers along with projections for 2016. For this year, the deficit will come in at around $98 billion, or, somewhere in the neighborhood of 15-16 percent of GDP. For 2016, the Saudis say spending could hit $224 billion while revenue should be roughly $137 billion, for a deficit of $87 billion or, about 12.8 percent of GDP. As you can see from Deutsche Bank's projections shown above, that's markedly better than expectations for this year and basically in line for next. According to Fahad al-Turki, chief economist at Riyadh-based Jadwa Investment, who spoke to Bloomberg by phone, the budget is "probably based on $50 bbl crude," which may well be the best indicator of all when it comes to predicting where prices go from here.
“The economic council worked to strengthen the efficiency of non-oil revenue,” Saudi official Hindi Al-Suhaimi said, explaining how Riyadh managed to hold the deficit under market expectations. We also learned on Monday that the monarchy may be looking to roll back the generous subsidies that weigh on the kingdom's budget. Here's the Saudi press agency:
Reviewing government support, including revision of energy, water, and electricity prices gradually over the next five years, in order to achieve efficiency in energy use, conserve natural resources, stop waste and irrational use, and minimize negative effects on low and mid-income citizens and the competitiveness of the business sector.
Recall that the Saudis are paying a heavy price to pacify the masses and ensure that some type of Arab Spring event doesn't come to Riyadh. Here's a bit of helpful color from Deutsche Bank:
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 $27 billion incremental revenues, or 20 percent 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 $0.11/l to $0.5/l) could have within the country.
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(Click to enlarge)
The Saudi government could look to increase electricity tariffs. This would be a challenge for residential consumption (51 percent of aggregate consumption) given the political/social impact, though it would present the highest incremental revenue benefit. Bringing up the electricity rates for industrial/commercial consumers to UAE levels could raise incremental revenues of $3 billon, which, while higher than those from the chemical sector feedstock impact, is still only 2.3 percent of the budget deficit.
What all of this seems to suggest is that the Saudis are holding up better than expected amid the price slump, which is bad news for shale as it means "lower for longer" oil prices.
While a 16 percent deficit this year and an expected ~13 percent deficit in 2016 certainly isn’t "good" news, Riyadh has apparently found ways to slow the bleeding which of course means they can continue their war of attrition for a while longer. Throw in the fact that the kingdom came into the year with virtually no debt and SAMA reserves on the order of 700 billion and the stage is set for further pressure on crude.
Hang on US producers: the next six months are going to be rough.
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