3 Reasons Saudi Arabia Is So Desperate For Cash by John Mauldin, Mauldin Economics
Early this year, the Crown Prince of Saudi Arabia revealed that Saudi Arabia is considering an initial public offering for state-owned oil company Aramco. Chairman of Aramco Khalid al-Falih later clarified that the IPO would not include Saudi Arabia’s oil reserves, estimated at 268 billion barrels.
“The reserves will remain sovereign,” al-Falih said in an interview with Al-Arabiya. He added that the kingdom is mulling options for an IPO of the firm’s “ability to convert these reserves into a financial gain.”
The statements were vague and the Saudis’ actual plan for the IPO remains unclear. However, whether or not the IPO happens is not important. What is vitally important is that it was publicly discussed by the Crown Prince of Saudi Arabia.
Aramco is the world’s most valuable company. It’s also one of the most important sources of geopolitical power for Saudi Arabia. And the Crown Prince was fully aware of the consequences the statement would cause.
All of this reveals what a desperate situation record-low oil prices have pushed the Saudi’s regime into.
The Kingdom Has Only 3–5 Years of Cash Reserves Left
There is one key principle driving Saudi Arabia to sell shares in Aramco: the kingdom needs money to buy time.
The Saudi Arabia Monetary Authority (SAMA) acknowledges that the country ran a deficit of 21.6% of GDP in 2015—a quantum leap from 3% the prior year. They hope to cut that to 13% in 2016. However, the IMF expects a deficit of 20% in 2016.
They have burned through almost $100 billion in reserves the last few years. A second, similarly sized deficit would consume another $100 billion. Reserves now stand at roughly $650 billion.
The problem with those estimates is that they assume an average price for Saudi light crude of $50 in 2016. As we write this article, West Texas Intermediate (WTI) is priced around $30. And that is the delivered price of oil. The actual price a producer gets is even less.
So, what happens to Saudi Arabia’s budget deficit if oil stays in the $30 rather than $50 range?
Bank of America Merrill Lynch gives us the following estimates:
Even with a 25% budget cut, Saudi Arabia would have just three to five years of reserves and borrowing available at $30 oil. We note that several respected investment banks are projecting that oil will fall to $20 this year.
If a crisis in Europe or China were to even slightly reduce global demand, $20 oil seems a very real possibility.
The Saudis Need Money to Hold the Arab World Together
Saudi Arabia has been spending lots of money to keep the Arab world—itself in a state of crisis— intact. Many Arab states have either collapsed or been severely weakened.
Saudi Arabia now confronts at least two key external challenges: Iran and the Islamic State.
Saudi Arabia sees itself as an enemy of Iran. As neither side is powerful enough to wage war on the other, they instead wage various (and very expensive) proxy conflicts throughout the region.
Beyond fighting proxy wars, Saudi Arabia also supports Arab states in economic turmoil, including Bahrain, Jordan, Morocco, and Egypt. They are attempting to lead a Sunni Arab coalition against Iran—and using their wealth to cement those relationships.
Saudi Arabia’s other external challenge is the rise of jihadist groups. The most significant of these groups is the Islamic State (IS). At this point, IS is behaving much like a state and has declared a caliphate in large parts of Syria and Iraq.
Saudi Arabia, therefore, is committing large amounts of monetary support to rebels in Syria fighting IS because it fears they could attack the kingdom. IS has been already staging attacks on Shiite mosques in Saudi Arabia and leveraging the region’s polarized sectarian climate to undermine the kingdom’s security.
Saudi Arabia Faces Serious Internal Challenges
The foundation of the country’s social system is the state’s ability to maintain a safety net for various segments of Saudi society. 70% of Saudi Arabia’s population is under the age of 30.
The government provides large subsidies for commodities like food and oil and offers social services and education for its majority Sunni Arab population.
The Saudi government currently provides free healthcare, free education, subsidized water and electricity, no income tax, and paid-for public pensions. Nearly 90% of Saudis are employed by the government, often at higher wages than the private sector offers.
Saudi Arabia also has a significant Shiite minority—possibly 20% of the total population. Riyadh has to somehow manage this group so that Tehran cannot overly influence it.
The Kingdom’s current financial straits render it unable to dramatically increase the money it throws at problematic groups in the country like dissident, reformist Shiites and jihadists. State-sponsored domestic spending that keeps the kingdom cohesive has also been cut, which poses serious risks to the social and economic stability of Saudi Arabia.
Desperate Times Call for Desperate Measures
The kingdom is built on oil money, and that money was used to create a technologically advanced and powerful country.
But the plummet in oil prices with no sign of a quick recovery, a brewing crisis of succession, the potential for domestic unrest due to budget cutbacks, and unprecedented external challenges have pushed Saudi Arabia in a hazardous direction: the consideration of an IPO for their most valuable asset, Aramco.
How the Fall of Saudi Arabia Could Lead the World to the Edge of Disaster
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The article was excerpted from the report Saudi Arabia—a Failing Kingdom.