Saudi Arabia could borrow record $58bn as oil slump bites

Saudi Arabia could borrow SAR220bn ($58bn) this year as it plugs a widening budget gap induced by plunging oil prices and crude production cuts, a record since the kingdom’s debut in international bond markets in 2016.

The government is looking at additional spending cuts and may issue as much as an additional SAR100bn of debt on top of SAR120bn riyals already announced, Finance Minister Mohammed Al-Jadaan said in a press conference on Wednesday.

Officials will not withdraw more than planned from reserves, he added.

“The kingdom went through similar crises in its history – maybe even worse – and was able to pass through them,” he said. “This is not an exception.”

Already under lockdown to contain the spread of the coronavirus pandemic, the world’s largest crude exporter is bracing for a second impact from the oil rout and unprecedented production cuts negotiated by OPEC and its allies. Both will slash government revenue, and in turn derail a fragile economic recovery. Brent crude is trading around $20 a barrel — a quarter of the level Saudi Arabia needs to balance its budget — leaving officials with limited options to offset economic pain without crippling public finances.

The government’s budget deficit could widen to 15 per cent of economic output, according to Mohamed Abu Basha, head of macroeconomic analysis at investment bank EFG Hermes in Cairo. The fiscal shortfall reached 4.5 per cent last year after peaking at just over 17 per cent in 2016, according to the International Monetary Fund.

The government has already tapped global bond markets twice this year and has borrowed a total of $19bn from local and international investors, according to data compiled by Bloomberg.

The government said last month that it planned to raise its debt ceiling from 30 per cent to 50 per cent of gross domestic product as it borrows more to cope with the crises.

Non-oil contraction
Without providing details, Al-Jadaan said the kingdom was “looking at additional measures” to reduce government spending. He added that officials expected to save some money during the virus-related shutdown as they spent less on travel, events and entertainment, and would “delay some spending on projects that are halted now.”

The challenge for officials will be balancing fiscal pressures with the need to support the economy.

Standard Chartered recently revised its economic growth forecast for Saudi Arabia in 2020 to a 4.5 per cent contraction from a previous expectation of 5 per cent growth, largely due to the agreement to cut oil production.

The government expects gross domestic product for the non-oil private sector to shrink “for the first time in history,” Al-Jadaan said.

He added that was “not surprising because of the precautionary measures” taken to slow the spread of the virus, including a 24-hour curfew in major cities.

Oil has already dropped below levels seen in 2015, when the kingdom first started tapping local banks to help fund the deficit. It also put the brakes on spending at that time by delaying tens of billions of dollars in payments for government contracts. The decision hit foreign and domestic investor confidence, and Al-Jadaan vowed to continue paying contractors on time during this crisis.

The government has announced a slew of stimulus measures to aid businesses during the virus shutdown, including a plan to cover 60 per cent of the salaries of some Saudi nationals working at private firms. In total, the state has pledged SAR177bn of support, according to the finance ministry — though that includes extra allocations for the health sector.

Officials are continuously studying the impact of the stimulus measures and will extend more support if needed, Al-Jadaan said.

“The private sector’s concerns are our concerns,” he said.