The massive US$75-billion annual dividend of Saudi Aramco cannot fund the widening budget gap of Saudi Arabia if oil prices remain low beyond 2021, Moody’s said in a report this week.
The Saudi budget depends to a large extent on the royalties, taxes, and of course, the dividend from Saudi Aramco, which pledges to pay US$75 billion in annual dividends to its shareholders, the largest of which is the Kingdom of Saudi Arabia with 98 percent.
The higher Saudi budget spending this year will be offset by Aramco’s capacity to pay dividends, Moody’s said in its report, but spending cuts will be needed in 2021 and after that, especially if oil prices remain lower for longer.
So far, the Saudi government has relied on Aramco’s dividends to cover a large part of its budget shortfall.
“The government is unlikely to be able to repeat the maneuver beyond 2021,” Moody’s said in the report, as carried by Bloomberg. Aramco will have its own capital expenditure (capex) needs and its commitment to buy petrochemicals giant SABIC to look after, according to Moody’s.
Earlier this week, Moody’s assigned a Aaa.sa long-term issuer national scale rating to Saudi Aramco, citing “an exceptional operational scale, significant downstream integration and strong financial flexibility given its low cost structure and low leverage relative to cash flows.”
All these provide resilience to the world’s biggest oil company through oil price cycles, but Aramco is strongly linked with the credit profile of Saudi Arabia and is expected to remain largely under government ownership with the government’s budget highly reliant on contributions from the company in the form of royalties, taxes, and dividends, Moody’s said.
This year, Saudi Arabia’s economy has taken a double hit from the pandemic and the crash in oil prices, while Aramco is now trying to contain the damage as it faces mounting debts after the SABIC acquisition and the low oil prices.
By Tsvetana Paraskova for Oilprice.com
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So far, the Saudi government has relied on Aramco’s dividends to cover a large part of its budget shortfall. However, this year’s dividend of $75 bn will most probably fall short of offsetting the bulk of the budget deficit in this year and the next. The situation would be the same in 2021.
Things could start to ease from 2022 onwards once oil prices and global oil demand start to improve with the eventual decline of the COVID-19 pandemic as a result of the development of effective anti-pandemic vaccines.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London