Saudi Arabia may face budget squeeze after 2021, Moody’s says

Saudi Arabia may not be able to rely on annual dividends of almost $75bn from state oil company Saudi Aramco beyond next year unless crude prices increase, according to Moody’s Investors Service.

The government, which owns 98 per cent of Aramco, has depended on the dividend to help plug its budget deficit.

“The government is unlikely to be able to repeat the maneuver beyond 2021,” Moody’s said in a report.

This is the case “particularly when taking into account Saudi Aramco’s own capital expenditure needs and its commitment” to buying Saudi Basic Industries Corp (SABIC).

Aramco agreed earlier this year to buy 70 per cent of the chemicals maker from the government’s Public Investment Fund for $69bn.

Aramco pledged during its 2019 initial public offering to pay out $75bn to shareholders during its first five years as a publicly traded company. It has since reaffirmed that commitment.

Yet, crude prices have fallen amid the coronavirus pandemic and are 35 per cent lower this year. Aramco, meanwhile is pumping less oil under a deal among global producers to reduce supply.

To honor its dividend pledge, the world’s biggest oil company has said it would decrease spending. It has also laid off hundreds of workers and announced plans to sell non-core assets.

Despite these steps, the company’s gearing ratio has risen, from -5 per cent at the end of March – meaning Aramco had more cash than debt – to 20 per cent in June, above its targeted range of 5 per cent to 15 per cent. That’s largely due to the debt it took on to acquire SABIC.

Saudi Arabia published an overview of its spending for the next three years that envisages annual cuts to help contain its fiscal deficit.

The plans were based on oil prices of around $50 a barrel, according to a Goldman Sachs Group analysis. Benchmark Brent crude was trading on Thursday at around $43 a barrel.