Google Saudi Arabia this week, and you will find oil headlines stealing the spotlight once again. In the span of just 24 hours on August 5 and 6, The Economist, the Financial Times, and the Telegraph’s Finance page all ran stories on the Kingdom’s oil-induced money woes:
Though unsurprising to see fuel prices (or terrorism, or fuel prices, or terrorism…) usurping all other possible stories about the Gulf, the close attention paid to Saudi this week by major financial news outlets indicates the increasing strain on the country, as a result of continuously low oil prices, as well as its own domestic and international policies.
In the Financial Times’ report on the Kingdom’s plans to issue $27bn in bonds, Simeon Kerr and Anji Raval note:
The monthly bond issuance plan would only cover part of the deficit, which economists estimate will reach SR400bn this year amid falling revenues and continuing high expenditure on big infrastructure projects, public sector wages and the continuing war in Yemen.
Likewise, in “A day of reckoning for fuel prices in the Gulf,” The Economist explains:
Unwilling to cut government spending, Saudi Arabia has already drawn some 244 billion riyals ($65 billion) from its reserves to cover spending in the first six months of the year. The government has also issued its first bonds since 2007.
As for the Telegraph, Ambrose Evans-Pritchard writes that, despite a deficit the International Monetary Fund expects will reach 20 percent of the country’s GDP this year, Saudi is far from curbing massive domestic spending and costly military campaigns abroad:
Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.
He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up – entirely reliant on imported weapons – that will propel Saudi Arabia to fifth place in the world defence ranking.
Since oil prices began to drop, Saudi Arabia’s has drained $65bn of its fiscal reserves to maintain government spending levels. At the end of December 2014, the Kingdom announced a 2015 budget that projected record high spending, despite enduring six months of low oil prices.
The monarchy has not faltered on its commitment to maintain hefty public sector wages, infrastructure projects, and social welfare, all of which are largely regarded as making up for absent political reforms and Saudi’s abysmal record on human rights.
Nor has the Kingdom curbed defense spending, and, instead, has launched a massive air campaign against the Houthi movement in Yemen. It has further plans to boost its defense budget by 27 percent over the next five years.
But, projections of a government deficit, plans to maintain spending domestically, and a commitment to continue military campaigns abroad do not necessarily indicate pending doom for Saudi. As the Financial Times points out, Ali al-Naimi, the Kingdom’s oil minister, told energy publication MEES last December that Saudi Arabia can look to the debt market for help:
A deficit will occur. But . . . we have no debt. We can go to the banks. They are full. We can go and borrow money and keep our reserves. Or we can use some of our reserves.
What spending-in-the-face-of-falling-oil-prices does indicate, however, is the Kingdom’s dogged adherence to propping up its domestic legitimacy with money, and asserting its power regionally by devastating neighboring Yemen with air strikes.