Oil War Hits Home as Saudis Cut Nearly 5% from National Budget
Saudi Arabia announced 50 billion riyals ($13.3 billion) in budget spending cuts after the crash in oil prices and the coronavirus outbreak wreaked havoc on its public finances.
As the kingdom doubled down in its price war with Russia, authorities signed off on expenditure reductions equivalent to under 5% of the total outlays approved in this year’s budget, Finance Minister Mohammed al-Jadaan was cited as saying by state-run Saudi Press Agency. Only days ago, the central bank unveiled a 50 billion-riyal package to support private businesses hurt by the disease known as Covid-19.
“The government approved a partial reduction in some items with the least social and economic impact,” al-Jadaan said, according to SPA.
“In view of the possible continuation of the effects of the spread of Covid-19 and its consequences on the global economy, the developments will be reassessed, items of expenditures reviewed and appropriate decisions will be taken in a timely manner,” al-Jadaan said.
Even before falling out with Russia this month over how to manage oil prices, the government embarked on three years of spending decreases by earmarking less money for subsidies, social benefits and the military. It was targeting a fiscal deficit of 6.4% of gross domestic product this year under the assumption that Brent would average about $65 per barrel. It needs oil at almost $84 to balance this year’s budget.
But the disintegration of the production pact between OPEC and Russia jolted the oil market and threatened to stretch the finances of the world’s biggest crude exporter. Benchmark Brent rebounded to just over $26 on Thursday after settling at the lowest since May 2003.
Saudi Arabia would run a budget deficit of 23% of GDP if Brent falls to $20, while its current-account shortfall would reach 15.6% of economic output, or $122 billion, JPMorgan Chase & Co. analysts estimate.
“Such a situation would imply a very fast rate of depletion” of Saudi foreign-currency reserves, JPMorgan analysts including Nicolaie Alexandru-Chidesciuc said in a report. “It would also be associated with a rapid increase in debt/GDP and would thus create serious financial stability issues. Consequently, the kingdom may not sustain the price war for very long.”
The kingdom was among the last in the Gulf to report cases of the virus, with a total of 238 identified so far. Authorities responded by suspending travel from neighboring countries suffering from the outbreak, stopped issuing tourist visas and shut down schools.
Saudi Arabia even took the unprecedented step of temporarily halting the Umrah religious pilgrimage for its citizens and residents. It also temporarily ordered all but essential workers to stay at home.
The kingdom is consulting with other Group of 20 countries about a potential summit next week in an attempt to unify efforts to slow the pandemic. Saudi Arabia is the G-20’s host nation this year.