Douglas-Westwood, an energy intelligence group, has said in its DW Monday report that Saudi Arabia has been hit hard by low global crude prices, and that with a considerable budget deficit, Saudi has been forced to begin borrowing from capital markets – $4billion in July.
DW has said that the kingdom is highly reliant on oil – accounting for more than 90% of budget revenues. According to DW, cuts have not been made to capital expenditure and Saudi has engaged in an expensive conflict within Yemen. Consequently, the decision to ride out lower prices has put a huge strain on finances – the IMF estimates $50 oil will lead to a deficit of ~$140bn (20% of GDP) this year, DW has said. Furthermore, plugging holes in the budget with bond issues is the clearest sign yet that the kingdom is feeling the pinch. DW poses a question, how long can it continue?
DW writes that at least for the time being, there seems to be room for more lending, with plans to raise $27billion by year end. Debt levels have been dramatically reduced since the late 1990s when borrowing reached 100% of GDP (prior to July’s bond issue, debt was 1.6% of GDP), DW has said in its Monday report. Also, at present, liquidity does not seem to be a problem with local banks easily absorbing bond issues. However, DW said, further borrowing into 2016 and beyond could prove problematic. Predicted rises in global interest rates over the coming years may make borrowing unattractive, forcing further withdrawals from the country’s foreign reserves. If current oil price trends continue, DW says, these reserves could fall to $200billion by 2018 – 70% less than pre-crash levels.
Maintenance of oil output has secured market share and proved devastating for US onshore drilling. However, DW concludes, with a “bathtub” shaped recovery a very real possibility, Riyadh may be forced to make a number of difficult decisions regarding domestic subsidies and expenditure in order to reduce a potentially crippling budget deficit.