Saudi Arabia Won’t Change Oil Production

The IMF has warned Riyadh that failure to cut spending and implement reforms will eat up the country’s fiscal reserves in just five years.

In recent months, the riyal has dropped in the foreign exchange forwards market to its lowest since 1999 because of fears that huge budget deficits as oil revenues fall might eventually force Riyadh to abandon its peg to the USA dollar. Saudi Arabia has resumed issuing domestic bonds, and the Finance Ministry projects the debt to rise to 5 percent of GDP in the coming year. Economic analysts knew it was coming; the 326.2 billion riyal gap between expenses and projected revenue was only to be expected with the world price of oil running at less than $40 a barrel.

A quarter of next year’s spending, or $57 billion, has been allocated for defence and security expenditures, the ministry said.

The proposal would save the government KD6.2 billion ($20.5 billion) over the next three years, Hamada said, estimating that without reforms, Kuwait would spend KD16 billion on subsidies over three years.

Meanwhile, yesterday oil prices dropped again. To hit breakeven, the Kingdom needs an average oil price of $59/bbl to $65/bbl.

That is actually less than the deficit for the current year, about $98 billion, or 15 percent of GDP, one of the highest in the world.

The Kingdom is also pushing through meaningful cuts in infrastructure, health care and education spending budgets. More are likely to go in 2016 as the pressure of producing more and spending less becomes too much. Egypt, Gabon, Bangladesh, UAE, Oman and Indonesia also approved deep cuts to or abolished subsidies this year. Fuel prices will still be low by worldwide standards. It derives 90% of its revenue from oil.

“We believe that it is a positive move in the long term as it should help put the kingdom on more stable fiscal footing”, said Jaap Meijer, managing director for equity research at Arqaam Capital in Dubai.

Many analysts think the Saudis are trying to bankrupt U.S. oil drillers.

A new report says Saudi Arabia’s economic growth is expected to further slow down in 2016 after the country announced record budget deficits due to slumping oil prices.

Oil accounts for 75% of Saudi Arabia’s revenue, and when crude prices were sky high, the country enjoyed frequent budget surpluses.

The Opec heavyweight shows no signs of wavering in the long-term oil strategy, it has orchestrated since the past year. The $224B budget for 2016 is conditioned on achieving budget savings to possibly include, fewer jobs created, lower subsidies for energy and water, and the creation of a sovereign wealth fund to improve investment returns. Domestically, Saudi Arabia’s budget deficit in 2015 was about 367 billion riyals.

“The kingdom reduced its dependency rate on oil revenues in 2015 and it will do the same in 2016 to overcome any negative impact from the decline in oil prices”, Sfakianakis said.