Saudi Arabian stocks fell on the first day of trading this week after the Finance Minister of the Kingdom warned that the government was preparing to implement “painful” measures for propping up the oil-dependent economy.
Bloomberg reports the Tadawul exchange shed as much as 6.8 percent with Aramco alone falling close to 6 percent, to below $7.99 (30 riyals) apiece.
“The kingdom hasn’t witnessed a crisis of this severity over the past decades,” Finance Minister Mohammed Al Jadaan told state media channel Al Arabiya. “The Kingdom is committed to the task of sustaining public financing, and is committed to having enough financial strength to face this crisis even if it is prolonged. We have taken several steps both in relation to health, and in relation to financial measures in terms of reducing expenditure. Right now, we are looking at what we can do to reduce the deficit level. Certainly, there has been a significant drop in revenues, and we will likely see its impact in the coming quarters.”
Since the start of the year, Saudi Arabia’s oil revenues have slumped by more than half, Al Jadaan also said, because of the drop in oil prices. Non-oil revenue has also been down since the start of the year. Foreign assets also fell, the official told the news channel, to $464 billion as of the end of March. This is the lowest foreign reserve level in 19 years.
Some of the measures considered by the government are more public spending cuts, a limit of $32 billion on how much of the foreign reserves the government can use to combat the economic fallout of the coronavirus, and more borrowing on international markets.
“We will continue to take loans, and we have seen a large demand on government debt securities, internally or externally,” Al Jadaan told Al Arabiya. “As per the plan we will take loans up to 220 billion [riyals], as per the conditions in the market and the available liquidity.”
By Irina Slav for Oilprice.com
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Without the influx of billions of dollars of oil money, multi-billion projects that are deemed vital for Vision 2030 for the diversification of the Saudi economy will be delayed or even shelved indefinitely. Moreover, the economy will not be able to create more than 6 million jobs needed to employ Saudi Arabia's youth. The economy could be left facing a mushrooming budget deficit estimated at $116 bn.
To this could be added another loss of $200 bn being a 10% devaluation of Saudi Aramco’s shares raising the total to $316 bn. Moreover, the devaluation of Saudi Aramco shares is a major threat as Saudi citizens have been investing not only their own money but also borrowed money from banks to buy Aramco shares.
At $30 a barrel, the Saudi wealth fund will deplete fast and reduced government spending will stall projects and increase the suffering of the non-oil sector. That’s the near-term damage. The longer-term damage is the lack of funds for Vision 2030 which was already going downhill even before the oil price collapse as the promised multibillion foreign investment wasn’t materializing. Saudi Arabia could go bankrupt in less than two years if the oil price remained at $30 a barrel.
Saudi Arabia is being forced to cut public spending by more $50 bn and borrow to the tune of $60 bn.
Still, Saudi Arabia and other Arab Gulf States are luckier than most of the world’s major oil producers in that they have financial cushions to keep them going until oil prices start to surge again.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London