Two troubling developments have occurred over the past week that indicate economic problems may be deeper in Saudi Arabia than had been realized.
First up, and more obviously, Saudi Arabia saw its credit rating downgraded. S&P took Saudi Arabia’s rating down to A-, saying that the ongoing slump in oil prices is causing serious harm to the country’s budget.
This is clearly true. The country, which previously had been running a 7% of GDP budget surplus sees its budget swing to a jaw-dropping 16% of GDP deficit for 2015. This, by comparison, would amount to the US running an almost unfathomable $3 trillion or so budget deficit. That’s the magnitude of the red ink Saudi Arabia faces in the new sub-$50 environment.
The budget deficit is expected to remain between 8 and 10% of GDP for the upcoming few years. Saudi Arabia had almost no public debt coming into the 2015, but obviously as this crisis deepens, that could change in a hurry.
Analyst estimates show that if oil stays at current levels, all else held equal, Saudi Arabia could run out of borrowing capacity within five years. The IMF bluntly warns that Saudi Arabia could be bankrupt by 2020.
Already, Saudi Arabia is showing signs of stress. They’ve opened up their stock market to foreign investors for the first time, eager to bring in suddenly desirable foreign hard currencies.
Even if this current oil crisis passes, Saudi Arabia faces profound longer-term problems.
The bloated royal family serves as a massive cost burden. Numbering thousands of members, this aristocracy introduces a heavy inflexible cost burden onto the country that leaves it difficult waters when economic conditions change.
The royal family is one of the few things sheltering the country from the sort of geopolitical tension that festers in the rest of the region. With the government considering reducing gasoline subsidies for the population in light of the country’s financial problems, its not hard to imagine social unease spreading.
The country’s overarching reliance on oil will come back to hurt it at some point. Sooner or later, the consequences of unmitigated resource dependency eventually come home to roost.
A new study in the respected Journal of Petroleum Science and Engineering estimates that Saudi Arabia will see its oil production peak in 2028, followed by an inexorable decline. Given that oil accounts for 80% of the Saudi economy, this is a huge issue.
Saudi Arabia faces another interim problem, even before the oil windfall starts to diminish. And that is that as Saudi Arabia’s economy grows, domestic energy consumption has soared. Saudi Arabia’s oil exports have started to fall, even while production rises, since more of the country’s production is consumed for internal uses.
So clearly Saudi Arabia has some issues, both during this current economic downturn and also in the larger picture. And that’s not the only concern. In the very short run, one of Saudi Arabia’s patrons, Egypt, is facing a much more pressing issue. Egypt has faced profound internal unrest in recent years, and the government instability had already hurt the economy and scared off tourists and foreign investors.
Now Egypt, which heavily relied on Saudi Arabia for aid, is reeling. Saudi Arabia has refused to aid the country further as it has to think about its homeward concerns. Egypt’s foreign reserves are down to $16 billion now. When you’ve got less cash on hand than embattled international pariahs like Argentina (around $25 billion), you’ve got massive trouble.
The economy is in a tailspin, tourism is way down, the currency has been devalued multiple times. The stock market is down double digits. There’s an ETF to play it, EGPT, but dip buying at this point is likely still premature.
With Saudi Arabia out of the picture, it’s unclear who will step up to Egypt’s aid. The other regional power that likes Egypt, Turkey, also finds itself in an economic hard spot.
The World Bank is arranging a $3 billion loan for Egypt, but given the depth of the economic concerns, that loan amount is likely insufficient. Cracks are showing in Saudi Arabia, and the first casualty will likely be ally Egypt.
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