We’ve spent quite a bit of time this year documenting Saudi Arabia’s fiscal bloodbath.
In the wake of the kingdom’s move to deliberately suppress crude prices in an effort to preserve market share by bankrupting the US shale complex, Riyadh found itself in a tough spot. Thanks to ZIRP and the wide open capital markets it fosters, US producers were able to stay afloat for longer than the Saudis likely expected.
Although the cracks are beginning to show (the US has seen the most oil and gas bankruptcies since the crisis this quarter), the damage was done. Thanks to the fact that the monarchy needs to maintain the everyday Saudi’s standard of living (not to mention continue to feed the American MIC by spending billions on weapons) implementing budget cuts is a tall order, so when oil revenue collapses, the red ink piles up quickly.
By the summer, it was readily apparent that the Saudis were set to run a budget deficit on the order of 20% of GDP. That risked imperiling the country’s vast SAMA war chest and so, the Saudis tapped the debt markets to offset the reserve burn.
Here's a look at deficit forecasts from Deutsche Bank...
...and here's a bit of color on the relationship between reserves and crude prices from BofAML.
Maintenance of the riyal peg - which the market pretty clearly thinks may fall - only adds to the pressure.
On Monday, we got the official numbers along with projections for 2016. For this year, the deficit will come in at around $98 billion, or, somewhere in the neighborhood of 15-16% of GDP. For 2016, the Saudis say spending could hit $224 billion while revenue should be roughly $137 billion, for a deficit of $87 billion or, about 12.8% of GDP. As you can see from Deutsche Bank's projections shown above, that's markedly better than expectations for this year and basically in line for next. According to Fahad al-Turki, chief economist at Riyadh-based Jadwa Investment, who spoke to Bloomberg by phone, the budget is "probably based on $50 bbl crude," which may well be the best indicator of all when it comes to predicting where prices go from here.
“The economic council worked to strengthen the efficiency of non-oil revenue,” Saudi official Hindi Al-Suhaimi said, explaining how Riyadh managed to hold the deficit under market expectations.
What this seems to suggest is that the Saudis are holding up better than expected amid the price slump, which is bad news for shale as it means "lower for longer" oil prices.
While a 16% deficit this year and an expected ~13% deficit in 2016 certainly isn’t "good" news, Riyadh has apparently found ways to slow the bleeding which of course means they can continue their war of attrition for a while longer. Throw in the fact that the kingdom came into the year with virtually no debt and SAMA reserves on the order of 700 billion and the stage is set for further pressure on crude.
And speaking of crude, WTI plunged back under $37 earlier today after Iran said it plans to add 500 b/d to the global deflationary supply glut just one week after sanctions are lifted.
Hang on US producers: the next six months are going to be rough.