By Rick Gladstone, The New York Times, December 28, 2015
Pressured by low oil prices and costly wars in the Middle East, Saudi Arabia announced a sharp reduction in its 2016 budget on Monday to control a worsening deficit, which is steadily draining the kingdom’s financial reserves.
The official Saudi news media reported that the Finance Ministry would cut spending, adopt new taxes and reduce price subsidies for fuel, water and power.
The cost of some grades of domestic gasoline, among the first to be affected, could rise as much as 50 percent, a potentially unsettling spike in a country where mass transit does not exist and cars are a basic necessity.
The Saudi stock market fell 3 percent in early trading on Tuesday, with Saudi Basic Industries, the biggest petrochemical producer, tumbling 8.3 percent.
The price of oil, Saudi Arabia’s most important export, has tumbled this year because of reduced global demand and fierce competition by producers — including the Saudis — to keep their share of the market. The market is expected to be increasingly competitive because Iran could soon be free to sell its oil under relaxed international sanctions after Tehran’s nuclear agreement with world powers. In the summer of 2014, oil exceeded $100 a barrel, but it is now trading well below $40.
The falling price has benefited oil-consuming nations while putting severe financial pressure on exporters like Saudi Arabia, Russia and Venezuela.
At the same time its revenue has slowed, Saudi Arabia has increased military spending, financing rebels in Syria and intervening in Yemen, where Saudi warplanes have been bombing the insurgent Houthi movement since March.
The Saudi kingdom has been spending more than it takes in, and by some estimates it could exhaust its foreign exchange reserves, now roughly $640 billion, by 2020 without deep cuts in spending, a big rise in the price of oil, or a combination of both.
The government ran a record deficit of about 367 billion riyals, or roughly $98 billion, in 2015, according to the Saudi-owned Al Arabiya news channel. Under the 2016 budget, the goal is to reduce the deficit to 326 billion riyals, or about $87 billion.
The Finance Ministry projected the 2016 budget to be about 840 billion riyals, down from 975 billion riyals this year, Al Arabiya reported.
Analysts examining the budget said the Saudis were assuming that a barrel of oil would average about $45 in 2016. But some said even that projection was overly optimistic.
“They have less than five years to lose all their foreign currency reserves because of their major financial deficits, cost of military campaign in Yemen and their support to Syrian rebels,” said Luay Al-Khatteeb, a nonresident fellow at the Brookings Doha Center in Qatar, who specializes in the political economy of the Persian Gulf countries.
“Saudi Arabia must act fast and smart by starting to gradually cut down on their subsidies, reduce superfluous spending on defense and privatize selected state-owned entities to generate cash,” he said.