Continued low oil prices and the war in Yemen have hit Saudi Arabia’s budget so hard it is creating a special office to oversee government spending and cut waste. On Monday, the Saudi Press Agency published an item noting that Saudi Arabia was “willing to cooperate with OPEC and non-OPEC producers” to maintain a “stable” oil market. WTI retook $42, however analysts remain pretty pessimistic about hopes that the Gulf OPEC nations are in any mood to restrict production, which is hurting budgets but helping with certain political objectives, such as killing US shale and hurting arch-enemy, Iran.
In a Bloomberg report, Zainab Fattah cites two people with knowledge of the matter who claim that the first projected budget deficit since 2009 inspired the decision to create an office to oversee government spending. The project management office will report to the Committee of Economic Development.
Saudi Arabia projects budget deficit for 2015
Similar bodies will be created in ministries, municipalities and state entities, designed to oversee projects and make sure they are completed on time and within budget. Spending controls have been put in place, and the International Monetary Fund has warned that assets to support spending may be exhausted within 5 years. At the same time as cutting spending, Saudi Arabia is dipping into foreign reserves, selling bonds and delaying projects while still maintaining a war in Yemen.
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“Saudi Arabia is looking to review its capital spending to focus on critical projects, whilst seeing where spending can be cut back,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. “Current expenditure generally is harder to cut back than capital, as it includes areas such as wages and subsidies.”
Standard & Poor’s downgrade sparks criticism
The sources cited by Bloomberg said that ministries of housing, municipalities, labor, health, education and transportation will all be affected. The original 2015 budget of $229.3 billion included $49.3 billion in spending on new projects.
This September Saudi Arabia’s net foreign assets reached a three-year low as officials dipped into financial reserves. Investments in foreign securities dropped by $23 billion, and the budget woes led Standard & Poor’s to downgrade Saudi Arabia.
In 2013 Saudi Arabia boasted a healthy budget surplus of 7% GDP, but the situation has worsened significantly to a projected deficit of 16% in 2015, and could reach as high as 20% next year. According to S&P Saudi Arabia could suffer deficits for the next three years unless oil prices increase significantly.
The Daily Speculator noted in a recent report:
The local Tadawul Equity Index (SASEIDX) recorded a 3 year low at 6881.4 on Sunday, down over -38% from its September 9 2014 high at 11159. However, even after this decline the index trades at a historically high multiple of 175 times the OPEC oil price, suggesting a failure to fully price in the risk of an extended period of very depressed oil prices. Of course we would accept that there is much more to the index than the price of oil, but much of the diversification that has taken place in recent years has been commodity driven, or into sectors such as construction, finance and real estate that have all benefited from the strong cash flows produced by the decade long period in which crude oil traded well above $40 per barrel.
Saudi Arabia has criticized the downgrade, but S&P’s outlooks remains negative. A further downgrade could be in store if deficits are not reined in or Saudi Arabia‘s cash reserves run low.
In an October report from Jason Turvey of Capital Economics, the research firm noted that Saudi Arabia’s Government could be under a hiring freeze, has ceased buying autos and furniture, and has reportedly stopped public promotions. Turvey states ” these measures provide the first evidence that policy in the Kingdom is now being adjusted to match the new reality of cheap oil.”
Some analysts believe that these cuts will not suffice. Despite beliefs to the contrary, Saudi Arabia requires a breakeven price of $80 per barrel of oil, notes a case study by Richard Vietor and Hilary White of Harvard Business School. With oil revenues making up a whopping 90 percent of the country’s budget, and oil trading at half that price, Saudi will need to sell more assets and even that may not suffice.
It appears for the time being that Saudi Arabia is stuck in a catch-22.