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Saudi Arabia may need sharper fiscal adjustments

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With another bout of extreme volatility witnessed in oil prices, countries in the Gulf Cooperation Council may continue to post budget deficits for a few more years, forcing them to raise more debt, until stability returns to oil market.

“We expect all of the large rated GCC economies, except Kuwait, to post general government deficits in 2015 and 2016,” Trevor Cullinan, Director and sovereign analyst with Standard & Poor’s told Gulf News.

Most of the countries in the GCC are already in deficit, following a more than 60 per cent decline in prices of oil, from which it derives most of its revenues.

However, the most likely hit could be Saudi Arabia, which is the largest exporter of oil. Lower oil prices and increased spending are forecast to widen the general government deficit to 14.4 per cent of GDP in 2015, according to Fitch ratings.

“Saudi Arabia is having a more expansionary fiscal policy in 2015, however, is likely to see a sharper adjustments going forward,” Monica Malik, chief economist at Abu Dhabi Commercial Bank told Gulf News.


The policy response has been limited and primarily consists of a reduction in capital spending that will take time to gain traction. Deficits in the mid-single digits are forecast for 2016 and 2017, assuming reduced capital spending, the absence of new one-off outlays and a gradual recovery in oil prices.


“Deficits would likely stay in double digits if there was no consolidation. Transparency on fiscal policy and out-turns is a weakness relative to rating peers,” Fitch Ratings said.

To bridge the widening gap, Saudi Arabia raised $5.33 billion through debt earlier this month, and plans to raise billions more to maintain its spending plans.

“In the first instance it seems that GCC governments are running down their assets in order to pay for burgeoning fiscal deficits. However, in order to diversify funding sources, build debt capital markets and to slow the depletion of their asset positions, the governments may also look to domestic debt issuance, as has happened in Saudi Arabia,” Cullinan said.

“GCC sovereigns may at some point also look to debt issuance in the international capital markets,” he added.

As a part of Saudi’s measure to diversify from oil, the biggest economy in the GCC, also opened its $500 billion strong equities market to foreigners to attract more international funds.

But despite that, S&P expects GDP growth of 2.5 per cent in Saudi Arabia in 2015, down from 3.6 per cent in 2014.

“We view Saudi Arabia’s economy as undiversified and vulnerable to the steep and potentially sustained decline in the oil price, notwithstanding government policy to encourage non-oil private sector growth,” Cullinan said.

Saudi Arabia derives about 40 per cent of its GDP, 90 per cent of government revenues, and 85 per cent of exports from the hydrocarbons sector.

Proactive UAE

“UAE has showed a proactive stance to the lower oil price by introducing a number of fiscal reforms measures. Official comments point to further reforms, including on the taxation side. The fiscal adjustment has been relatively gradually, thereby balancing them with the growth outlook,” Malik said.

UAE took a proactive step of removing the subsidy on gasoline, a move that could save the emirate $12.64 billion, or 2.87 per cent of GDP, in 2015.

Qatar on the other hand also faces medium-term risks. Externally, it has limited potential for gas revenues to rise, with production flat from 2018 and further downside risks to the price on the back of rising global supply.

While hydrocarbon output growth in nominal terms is expected to contract sharply on the back of the substantially lower energy prices, the country is expected to face relatively weaker contraction in nominal GDP compared to the other GCC countries due to Qatar’s long-term gas agreements.

“With the medium-term outlook for oil remaining weak, GCC countries will have to adopt a tighter fiscal policy. There are also indications that the lower oil price is resulting in a more cautious approach by the private sector, which will likely result in weaker spending and investment as well,” Malik said.

Gulf News

9 Comments on "Saudi Arabia may need sharper fiscal adjustments"

  1. BobInget on Wed, 26th Aug 2015 6:06 pm 

    The article is about the MidEast. Understood.

    What OPEC nation has the world’s second largest oil reserves, has been driven to near bankruptcy by punishing low oil prices?

    What OPEC nations subsidizes gasoline and diesel to retail for .09 and .17 cents a gallon?

    What OPEC nation supplies subsidized
    liquid fuels to a half dozen Caribbean and C. American nations?

    Which OPEC member owns CITCO, a giant US downstream petrol refiner and retail outlet.

    Name the OPEC member that recently signed
    long term trade deals with Russia and China?
    Trade deals detailing exclusive export arrangements?

    Name the country that by 2025 will be capable of importing every exportable oil barrel?

  2. BobInget on Wed, 26th Aug 2015 6:17 pm 

    While African OPEC members Algeria and Libya are mentioned, the most populous African country, an OPEC member as well avoids comment.

    IMO, Nigeria will suffer greater political change then any other OPEC member because of under pricing Per Resident. Nigeria, unlike underpopulated Saudi Arabia, Kuwait etc has no fall back position.
    No other OPEC member apart from Iraq is
    suffering greater hardships and violence.
    Not all due to low oil prices, in fairness.

  3. rockman on Wed, 26th Aug 2015 6:31 pm 

    And despite the FACTUAL NUMBERS that keep popping up it’s really becoming very comical to se some folks arguing that the KSA is intentionally forcing oil prices down to hurt US shale drillers. Just consider that the KSA is losing TWICE AS MUCH REVENUE as all the US shale drillers COMBINED. And done to “gain market share”??? The KSA has had a market for every bbl it has been producing including all the added oil it’s producing today despite the fact that US shale drillers have yet to reduce their production by anything close significant.

  4. Nony on Wed, 26th Aug 2015 7:50 pm 

    Depending on how you count it exactly, SA production is up ~1MM bpd from their typical levels last few years. If you go by their absolute lowest in 2009 (when they were manipulating price by intervening), it’s 2 MM pbd up.

    US on the other hand has added 4-4.5 MM bpd to their production. So the US is at least double, more realistically quadruple the impact on markets as Saudis.

    Saudis should not be blamed for crashing the price. US shale crashed the price.

    Oh…and as a consumer, I LOVE the idea of Saudis pumping all out instead of trying to stabilize price. It’s bizarre to me that a NON intervention of a cartel members is called out as suspicious.

  5. Nony on Wed, 26th Aug 2015 7:55 pm 

    By the way, the Saudis have been to this movie before. It was a similar situation in 1986. (Not identical, nothing is. But very similar.) They are not going to make the same mistake they made in the 80s when they cut their production from 9 MM to 3 MM. All the while the US, UK, Norway were pumping all out. And so were Iraq and Iran and the rest of the OPEC cheaters (everyone except UAE and Kuwait cheated).

    See attached pdf (download to read) on what happened in 1986. It’s long but fascinating. Skip to the parts about 1986.

  6. Makati1 on Wed, 26th Aug 2015 11:41 pm 

    They have years before their foreign reserves are gone.

    Can the US oil industry last that long?

    Can the US financial system survive the flood of USTs & USBs flooding back into the US from the rest of the world as they cahs out to pay the bills?

    We shall see.

  7. JuanP on Thu, 27th Aug 2015 7:16 am 

    BobInget, Venezuela’s reserves were rated the largest in the world in recent updates, second to none.

    Venezuela not only sells subsidized oil to Caribbean and Central American nations, they also sell subsidized oil to South American nations, too. Uruguay, the country wereI was born, has been buying discounted Venezuelan oil on credit for years, and believe me when I say that those loans will never be paid back.

    But, like you said, the article is about GCC countries, not Venezuela.

  8. JuanP on Thu, 27th Aug 2015 7:21 am 

    BobInget “Nigeria, unlike underpopulated Saudi Arabia, Kuwait etc has no fall back position.”

    If you think KSA and Kuwait are underpopulated, you really don’t know much about them. I agree with you that Nigeria is an overpopulated basket case, but so are KSA and Kuwait.

  9. Kenz300 on Fri, 28th Aug 2015 6:38 am 

    Time to end subsidies for fossil fuels……. internal growth rates are unsustainable……

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