How Much Longer Can Saudi Arabia's Economy Hold Out Against Cheap Oil?

The Saudi budget, which draws some 90 percent of its revenue from the petroleum sector, has
been heavily hit by a 50 percent drop in oil prices and is expected to incur a deficit amounting
to 20 percent of GDP in 2015($130bn)the International Monetary Fund estimation.
Saudi Arabia is preparing to cut billions of dollars from its budget amid a steady drop in
crude oil prices, a Bloomberg report suggests. Reportedly, Riyadh is currently working with
advisers to review capital spending plans and delay some projects.
Saudi government is also issuing more conventional treasury bonds and Islamic sukuk bonds
to finance the budget deficit. They so far issued bonds worth around 100 billion riyals
(17.8bn) to help with the shortfall.
Economic growth is expected to slow from the 3.5pc recorded last year, with the IMF
forecasting in July that the Saudi economy would expand by 2.8 pc this year.
According to the official figures, Saudi economy grew 3.8pc in the second quarter, up from
2.4pc in the previous period, due to a rise in oil production. But Saudi Arabia pumped a
record 10.6m barrels per day in June but this slowed to 10.4 million bpd in July
Reserves at the central bank tumbled 10 percent from a year ago, or by more than $70 billion.
The Tadawul All Share Index lost 18 percent in the past three months and dragged stocks
down across the Gulf region. The benchmarks moving averages made a so-called death cross
on Aug. 18, a sign to some investors that more losses are ahead.
As a result, there may be a possibility of the devaluation of the riyal.
The country has declined to cut production and lift prices over the past year to gain market
share from the shale industry in the U.S. and other producers with higher expenses, even if
thats come at a cost to its finances.
Saudi Arabia still has $664 billion of net foreign assets, equal to almost 90 percent of the
economy, and little debt.
According to the David Butter, associate fellow at Chatham House in London I wouldnt say
theres any kind of crisis or even a crisis on the near horizon, Theyre in the oil business.
Theyve had it pretty good for quite a long time and thats not typical.
Even so, the IMF recommends that Saudi Arabia control its growing wage bill, make changes
to government subsidies for fuel and electricity and bring in more non-oil revenue through
taxes.
Submitted By:

Ishita Singh
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