Saudi Arabia's falling oil price puts budget in the red

Text by: Agnieszka Kumor

Riyadh faces a budget headache. Revenue from petroleum products is lacking due to the coronavirus pandemic and oil prices that continue to plummet. This drop could undermine the ambitious reform plan of the heir to the throne, Mohammed ben Salman.

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The dollar reserves of the Central Bank of Saudi Arabia, the world's largest exporter of crude oil, are at their lowest level in a decade due to the economic conditions caused by the Covid-19 pandemic and the drop in oil prices that caused it. has resulted. Revenue from petroleum products does not enter the coffers of the kingdom, causing a public deficit of $ 9 billion in the first quarter of this year.

RFI: In the long term, could this decline undermine the ambitious reform plan of the heir to the Saudi throne, Mohammed ben Salman? The response of Francis Perrin, associate researcher at the Policy Center for the New South in Rabat and director of research at the Institute of International and Strategic Relations in Paris (IRIS) 

Francis Perrin : At a minimum, it will complicate and no doubt delay the implementation of this economic diversification plan which is often called Saudi Arabian Vision 2030. Already, the 2030 deadline seemed a little short. If we try to be realistic in this area, we would need a longer horizon for Saudi Arabia, because this country has remained extremely dependent on oil for several decades. We are in 2020. There will be less oil revenues due to the fall in prices and the drop in consumption. It will therefore be necessary to review the calendar at least in 2020 and, perhaps, in 2021. But in any case clearly it is a heavy blow for the crown prince, Mohammed ben Salman. Ultimately, its political future in Saudi Arabia will be strongly linked to the success or failure of this program to diversify the Saudi economy. 

Since the last drop in oil prices in 2014, the budget of Saudi Arabia has been systematically in deficit. The country had to borrow more than $ 100 million and draw on its financial reserves. Is he preparing for an austerity cure?

When you are a country which, like Saudi Arabia, is also dependent on oil, and therefore oil revenues, and oil prices collapse by less than 70%, you are experiencing a very violent shock. Faced with such a challenge, it is unthinkable to change nothing in relation to the economy and the budget. Saudi Arabia is currently hit in the heart of its economy, which is oil. Inevitably there will be, perhaps several times, measures that will be taken in the area of ​​austerity. Obviously, a budgetary austerity in Saudi Arabia in 2020 will not be the same as an austerity in Iran where it will be much harder. It is not the same as in Venezuela or Gabon. For a simple reason that Saudi Arabia has accumulated large foreign exchange reserves. These reserves obviously diminished as Riyadh drew on them to compensate for the drop in its revenues. But they remain important, and thanks to them Saudi Arabia will be able to pass this difficult milestone. However, measures will have to be taken, notably budgetary, to deal with the decline in economic growth, or even stagnation, or even the recession. To continue in 2020 as before is practically an impossible mission.

Riyadh concluded a historic agreement on April 12, 2020, which constitutes a cease-fire in the price war against Moscow. Will this agreement, which reduces oil production by 9.7 million barrels per day (Mb / d) from May 1, be enough to boost prices? Could Saudi Arabia be the victim of its own oil strategy?

After the failure of the Opep + summit on March 6, 2020 in Vienna, the Saudi strategy changed 180 degrees. Before that date, it generally consisted in defending a certain level of oil prices so that they did not fall too low. After the Russian refusal of OPEC's proposal for a joint reduction in oil production, the Saudis said to themselves: "since the Russians want to play personal, we will do the same". They therefore announced that from April they would open the floodgates by increasing their oil exports. Which was very risky, since oil prices were already falling. A very risky strategy, therefore, but one which has produced some positive results since Russia has finally accepted a much greater reduction in production. This war caused prices to fall even further, worsening the situation of producing countries, including Saudi Arabia, but it has paid off. 

For the moment, namely at the end of April, the oil markets do not yet have enough confidence in the fact that the measures announced by OPEC and its allies will be sufficient to deal with the current situation which is of exceptional gravity. . And so oil prices haven't really gone up. However, the agreement has not yet started to apply. This will be the case from May 1st. And it will take a few weeks to see how this agreement will be applied and implemented by each of its signatories.

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