It’s a different Saudi Arabia that confronts another collapse in oil prices.
When the kingdom last stared down the crash in crude, it wielded reserves that peaked at over $735 billion in 2014. The stockpile was down by over a third just three years later, channeled almost entirely toward deficit spending.
Saudi Arabia may now be blowing through its reserves at the fastest pace in at least two decades, but the government is barely using the holdings to cover fiscal needs. Following its debut in international bond markets in 2016, borrowing covered most of the budget deficit in the first quarter.
Goldman Sachs Group Inc. predicts the central bank’s reserves, down more than 100 billion riyals ($27 billion) in March alone, will stabilize soon.
“Despite a further anticipated decline in oil revenues in the second quarter, we expect the rate of reserve burn to slow,” Farouk Soussa, a Goldman Sachs economist, said in a report.
With its buffers already fragile and the economy waylaid by the coronavirus, Saudi Arabia is looking to scale back spending and rely more on debt. Straining under lockdown to contain the spread of the pandemic, the kingdom is also bracing for a second impact from the oil rout and unprecedented production cuts negotiated by OPEC and its allies, after a damaging price war between Russia and Saudi Arabia.
What Our Economists Say...The government is planning to tap $32 billion of reserves this year to finance the deficit. Given the liquidity injections into the banking system and the cost of offsetting capital flight, the eventual decline in the central bank's holdings will probably exceed that amount.
Last month’s drop of over 5% in the central bank’s net foreign assets still brought the stockpile to just $464 billion, the lowest since 2011, according to data compiled by Bloomberg. Last week, Finance Minister Mohammed Al-Jadaan said the kingdom would only draw down reserves by up to 120 billion riyals over the whole year. The government used none of its reserves to cover the fiscal shortfall of 34.1 billion riyals in the first quarter, but tapped its current account with the central bank for 9 billion riyals, according to the Finance Ministry.
“It’s a very critical situation for Saudi Arabia,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Pressure will increase in the second quarter with lower oil prices and production.”
Besides leaning heavily on its reserves after the previous oil crash, the kingdom also deliberately delayed tens of billions of dollars of payments to contractors. The fiscal pressure at the time was a catalyst for difficult choices that officials had delayed for years, and the government not only cut domestic energy subsidies but also introduced new taxes and fees.
Authorities additionally embarked on an economic transformation project called Vision 2030 under now-Crown Prince Mohammed bin Salman, who said the kingdom would be able to live without oil by 2020.
Now, as crude prices collapse again, the political implications are far-reaching: officials will need to find a way to contain the fiscal damage while still supporting the economy and jobs for Saudis. That’s increasingly urgent as a demographic bulge of young people enters the workforce.
In a recent presentation for Saudi officials seen by Bloomberg, Harvard economist Ricardo Hausmann suggested that the government cut the public sector wage bill as well as “major planned investments” to help cope.
With a large portion of Saudis employed by the state, public sector salaries are the biggest chunk of government spending – 55% last quarter. That’s a 2% increase compared with the same period last year, while spending on health and social development fell 13% over the same period.
Yet slashing government salaries or firing workers are unlikely choices in the current crisis, as officials insist that supporting citizens is their top priority and roll out stimulus packages for businesses.
Meanwhile, military outlays were up 6% last quarter compared with the same period in 2019, highlighting how an end to the kingdom’s five-year war in Yemen, if it were to be negotiated, could give a small boost to the budget.
While the snapshot of Saudi Arabia’s finances in March was bad enough, the outlook has turned even more grim since then. Oil prices have fallen lower, even briefly plunging below zero in the U.S., as the coronavirus outbreak destroys demand for fuels. The collapse in consumption has led to a swelling glut that’s testing storage limits worldwide.
It presents an urgent challenge for Saudi Arabia, where crude sales underpin the economy and make up most of the government’s revenue.
“The kingdom went through similar crises in its history- maybe even worse- and was able to pass through them,” Al-Jadaan, the finance minister, said last week. “This is not an exception.”
Only about a third of last month’s total decline in net foreign assets reflects the government’s use of its current account, while another third represents dollar liquidity likely injected into the banking system. The remainder possibly went to offset capital flight, said Ziad Daoud of Bloomberg Economics.
But despite the looming declines in Saudi oil revenue, Goldman Sachs says reserves may be depleted at a slower rate already this quarter, pointing to factors such as external borrowing and a likely drop in imports as a result of measures taken to contain the pandemic.
The finance minister has said the government wouldn’t lean more than anticipated on its reserves, with the kingdom planning to boost borrowing to 220 billion riyals this year.
Saudi Arabia has already tapped international bond markets twice this year and has borrowed a total of $19 billion from local and international investors, according to data compiled by Bloomberg.
–With assistance from Matthew Martin, Manus Cranny, Yousef Gamal El-Din and Zaid Sabah.