Saudi Arabia
is burning through its foreign reserves at an alarming pace in the
wake of the oil price slump and a sharp rise in military spending. To
maintain its lavish spending, the royal family has used up $60
billion of foreign assets in the first six months of the year and
borrowed $4 billion from local banks.
According to
the IMF, Saudi Arabia’s fiscal deficit could rise to around $140
billion by this year-end or 20% of GDP. By Saudi measures, this size
of deficit is hugely massive for a country which is accustomed to
running hefty surpluses. Government revenues, meanwhile, are set to
fall by $82 billion in 2015 or 8% of GDP in a country where oil
income accounts for 90% of the state spending.
Standard and
Poor’s cut its credit outlook for Saudi Arabia in February to
negative from stable, saying it viewed the country’s economy “as
undiversified and vulnerable to a steep and sustained decline in oil
prices". The gloomy situation is down to the oil price slump
from $107 a barrel about a year ago to below $50 at present. This is
ominously bad for a rulership which needs a break-even point of $106
a barrel to fund its lavish welfare state.
But Riyadh
cannot blame anyone but itself for the situation. Since last year,
the country has been producing oil at full-throttle, leading to a
glut in the market and a price crash. With record production of
10.564 million barrels per day, the kingdom is refusing to cut output
under the illusion that the policy would drive US shale producers out
of business and force Russia and Iran to drop support for the Syrian
government.
By all
accounts, the regime has miscalculated, given that US shale oil
production has risen to a 43-year high of 9.6 million barrels per
day. According to the Saudi central bank’s shocking
acknowledgement, "It is becoming apparent that non-OPEC
producers are not as responsive to low oil prices as had been
thought.”
At the same
time, the new Saudi ruler, King Salman, has been following an
adventurist policy since coming to power in January. He and his son,
the defense minister and second-in-line to the throne, have launched
a costly war in Yemen and carrying out airstrikes in Syria.
Thanks to
the new king, Saudi Arabia is also engaged in a massive military
buildup that will catapult the kingdom to the fifth place in the
world ranking for military spending. According to the governor of the
Saudi Arabian Monetary Agency Fahad al-Mubarak, the country will see
increased borrowing in the coming months.
Economists
say the kingdom will have to issue around $5 billion of bonds per
month through the end of 2015, including to foreign investors, to
cover the budget deficit. Populist spending is the glue which keeps
the Saudi community together and dissent in check at a time of
boiling unrest in the oil-rich Eastern Province. King Salman splurged
$32 billion in his coronation as bonuses to all workers and
pensioners. Huge subsidies on fuel, electricity and food and charging
no taxes on income and interest have stripped the regime of a vital
tool to diversify revenue sources.
Moreover,
the kingdom is saddled with exorbitant costs of a patronage system
which has expanded as it tries to smother dissent since the Islamic
Awakening hit the Arab world.
Saudi
Arabia, however, is sleeping on the laurels of its huge foreign
reserves peaking $737 billion in August 2014. Those reserves dropped
to $672 billion in May and are falling by at least $12 billion a
month at current levels. The Saudi regime, hence, seems trapped in
the economic and political wars of its own making. It appears headed
for a steep cut in investment spending in the short term but
ultimately it has to face a draconian austerity and an inevitable
bankruptcy.
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