Saudi Arabia may run out of cash considerably faster than ever before anticipated if oil prices don’t recovery quickly.
Its budget is in very good shape by most measures, since the boom years for oil prices helped it bring down debt for an estimated 7.8 per cent of GDP in 2015, from 100 per cent in 1999. Saudi Arabia also offers more than US$600-billion price of forex reserves.
Yet the International Monetary Fund has warned the Saudi Arabian government’s current policies can often mean it runs short of the financing to aid spending within 5 years. Without a significant increase in the cost of oil, analysts at National Bank Financial think significant change might need to come in as little as Twelve months.
“Inevitably, worries about having insufficient financial reserves to keep political stability (via generous social programs), support of geopolitical allies and long-term plans for economic diversification will require precedence over all other goals,” geopolitical analyst Angelo Katsoras told clients. “Thus, the nation might be forced to negotiate reductions in oil production along with other major oil producers, including even with geopolitical rivals such as Iran and Russia.”
These countries are also facing urgent financial constrains, at the same time as renewable power sources and innovations for example electric cars still gain traction.
Katsoras noted that Saudi Arabia went from the budget surplus of 12 percent of GDP this year to a projected deficit of 21.6 per cent, or roughly US$150 billion, in 2015.
He also cited another rather grim forecast from the IMF: the country’s public debt as a number of GDP may jump to almost 45 per cent by 2020, from below two per cent in 2014.
Meanwhile, Saudi Arabia’s foreign reserves have already dipped to US$640 billion as of no more October 2015, from a record high of US$747 billion in August 2014.
Oil makes up about approximately 80 percent of presidency revenue and 45 percent of GDP, despite tries to diversify the economy.
Katsoras noticed that Saudi Arabia needs crude at US$106 per barrel to be able to balance its budget, much higher than the US$69 price it needed in 2010. That’s the result of major increases in social programs and government wages.
The analyst noted the increase was “to be able to buy social peace and therefore lessen the risk the unrest plaguing a lot of the Middle East would spread to Saudi Arabia.”
Now, however, the country faces dramatic spending reductions if weak oil prices persist also it runs out of cash.
For now, Saudi Arabia plus some of their allies are sticking with high oil production levels to try to force higher-cost producers around the world to create cuts.
As oil prices still slide, time these have stay afloat, is easily dwindling.