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How Long Can Saudi Arabia Hold Out on Oil?

August 21, 2015 By Young Research

Bloomberg’s Vivian Nereim and Donna Abu-Nasr write that Saudi Arabia is facing serious economic trouble as a result of continued low oil prices:

Economists are predicting a budget deficit of as much as 20 percent of gross domestic product and the International Monetary Fund forecasts a first Saudi current-account deficit in more than a decade. Reserves at the central bank tumbled 10 percent from a year ago, or by more than $70 billion.

As a result, bets on the devaluation of the riyal are surging. The Tadawul All Share Index lost 18 percent in the past three months and dragged stocks down across the Gulf region. The benchmark’s moving averages made a so-called death cross on Aug. 18, a sign to some investors that more losses are ahead.

The authors write that the situation mirrors, somewhat, events in 1998.

The difference is the sheer cost of maintaining the state as an employment machine and guarantor of the riches that Saudis have become accustomed to since the last squeeze. Subsidized gasoline costs 16 cents per liter and while there’s the religious levy called zakat, there is no personal income tax in the nation of 30 million people.

“The Saudi government can’t continue to be the employer of first resort, it can’t continue to drive economic growth through the big infrastructure projects and it can’t keep lavishing on subsidies and social spending,” said Farouk Soussa, chief Middle East economist for Citigroup Inc. in London.

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