Compare this conclusion from the Institute for International Finance (IIF) in September:
| "Even if oil prices fall below $90/b, the [Saudi Arabian] government’s large spending plan is not expected to change for the next few years since the resulting deficits could easily be financed given the ample financial resources of the Kingdom (net foreign assets exceed 90% of GDP), and the very low government debt (less than 10% of GDP)." |
With this no-holds-barred admission from a top Saudi official earlier this week (
via the FT):
| "Saudi Arabia is aiming to keep oil prices at about $100 a barrel, a third above its previous public target, in a sign that Riyadh needs higher oil revenues to sustain a big rise in public spending.
Ali Naimi, the Saudi oil minister, on Monday for the first time said the world’s largest oil producer aimed to keep oil prices at the triple-digit level." |
That’s quite a bombshell.
Saudi Arabia has previously been seen as a moderate voice in Opec, especially compared with the likes of Venezuela. The country has historically shied away from specific price targets, arguing this should be a function of supply and demand and the Kingdom’s role is to ensure the global market is adequately supplied, leading analysts to estimate a $70-90 per barrel (pb) oil target is a level the country is probably comfortable with. But the recent GCC-wide jump in discretionary spending as a response to the Arab Spring has heaped medium to long-term structural pressure onto the fiscal stance and, by consequence, the Kingdom’s oil price sensitivity.
According to the IMF, in 2011 the country needed an oil price of $80pb to balance the books, compared with $50pb in 2008, and just $25pb a decade ago, underscoring Riyadh’s rapid growth as a provider of goods and services in the economy.
But just how strong are the fiscal headwinds? In July, Jadwa Investment, a Saudi securities house, painted a somewhat bearish picture on the country’s prospects – and an out-of-the-consensus call at the time -, citing the likelihood of substantial deficits from next decade onwards and the need for difficult structural reforms.
Next decade will prove a game-changer for the country’s fiscal metrics, it argued:
| "After the benign decade ahead, unless the current spending and oil trends are changed, the government faces a very different environment:
• Domestic consumption of oil, now sold locally for an average of around $10 per barrel, will reach 6.5 million barrels per day in 2030, exceeding oil export volumes.
• We do not expect total Saudi oil production to rise above 11.5 million barrels per day by 2030.
• Even with a projected slowdown in growth of government spending, the breakeven price for oil will be over $320 per barrel in 2030.
• The government will be running budget deficits from 2014, which become substantial by the 2020s. By 2030, foreign assets will be drawn down to minimal levels and debt will be rising rapidly.
Preventing this outcome requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the Kingdom’s share of global oil production." |
Headwinds include: low non-oil related tax revenues, the government’s large wage bill, the fact that a) oil production is set to rise only modestly in the coming years and b) domestic energy consumption is set to jump.
There's plenty more in the full report.
There are a host of issues connected to a potential run-down of savings in Saudi Arabia, with potentially profound ramifications for regional politics, global energy co-operation and sovereign wealth fund investment trends.
For now, it’s worth considering how this fiscal game-changer will affect the great recycling game of Gulf petro-dollars.
Large-scale Gulf savings tend to have two big consequences:
1. Governments and consumers in the Gulf, armed with state handouts, have driven up demand for imported goods and services, increasingly from emerging market nations.
2. Meanwhile, excess savings flow offshore and are stored in liquid dollar-denominated external assets, often US Treasuries, due to the region’s dollar peg.
On the first point, high oil prices in recent years have seen imports by Middle Eastern countries (with Saudi Arabia a large component) surge to $483 billion in January-October 2010, nearly 300% higher than during the same period in 2002 ($124 billion), according to the IMF.
From a March 2011 Citigroup report:
| “Exports to the Middle East countries have risen extremely strongly in recent years from Brazil, Argentina, Germany, Italy, China, Switzerland, Korea, India and Turkey. For Korea, India and Turkey, exports to the Middle East are 2% of GDP or higher, and these economies could receive additional indirect gains, for example in higher remittances to India and involvement of Korean construction companies in the Middle East... In countries with high trade and FDI exposure to oil exporters, the recycling of petrodollars could go a long way to offsetting the adverse effects on real incomes of the rise in oil prices – and many of these countries, such as India, Turkey and Korea, are also among the largest net oil importers." |
But if Saudi savings are run down, it’s not clear if such import demand is sustainable, a potential blow to its newfound emerging trade partners.
Secondly, Saudi savings famously migrate to T-bills, helping to depress the global perceived risk-free rate and kicking off a familiar dynamic: yields on conventional assets get compressed, triggering a bidding war for high-returning assets etc. But if Jadwa’s estimates ring true, the US will no longer be able to bank on the Saudi Arabian Monetary Authority’s large-scale investments in US Treasury notes – currently estimated at $360 billion.
To sum up, while much ink will be spilt on how Saudi Arabia’s desire for a $100pb oil target will impact global energy markets, the country’s changing fiscal complexion in the next decade could also have a profound long-term impact on global capital and trade flows.