“For Saudi Arabia, the shock transmits mainly through the loss in government revenue and exports caused by the drop in oil demand and prices”, Moody’s said Friday, in the course of cutting the kingdom’s outlook to negative from stable. “The government’s balance sheet has weakened since the previous oil price shock in 2015-16… leaving the sovereign’s credit profile exposed to the further prolonged period of depressed oil prices that the pandemic may usher in”.
Moody’s assessment reflects (and likely understates) the rather daunting financial reality the Saudis face in a world where demand for crude collapsed by as much as 30 million barrels per day at the height of the coronavirus shutdowns, which put economic activity on ice across developed and emerging economies for the better part of six weeks.
The IEA called last month “Black April“, while describing 2020 as the “worst year in the history of global oil markets”.
For Riyadh, this is something of a self-inflicted wound. While it’s true that Russia walked out of the original Vienna meeting when OPEC+ still had a chance to stay ahead of the pandemic by slashing production, it was the Saudis who fired the first shot in the price war the following day (on March 7).
Late last month, Saudi Finance Minister Mohammed Al-Jadaan said the government may issue another 100 billion riyals in debt this year in an effort to help stop the expected budget bleed from collapsing crude prices. When you add that to the 120 billion riyals in issuance already announced, it means the kingdom could tap the market for around $60 billion in 2020, the most since its debut four years previous.
To be sure, there’s no shortage of demand if the kingdom does, in fact, raise its debt ceiling as planned. Orders for a $7 billion sale last month totaled some $54 billion, for example.
But the situation is getting pretty dicey, something Moody’s underscored Friday.
“Based on [new] oil price assumptions and Saudi Arabia’s commitment to cut oil production, Moody’s now expects that government revenues will drop by about 33% in 2020 and about 25% in 2021 relative to 2019, even after accounting for potentially higher dividends from state-owned entities”, the ratings agency said, adding that “a sharp slowdown in GDP growth will also depress revenue from the non-oil sector”. Here’s some additional color from Moody’s:
[We] project that the fiscal deficit will widen to more than 12% of GDP in 2020 and more than 8% in GDP in 2021 from 4.5% of GDP in 2019. This will cause government debt to increase to around 38% of GDP by the end of 2021 from less than 23% of GDP in 2019. These projections assume significant drawdowns from the government’s liquid assets, worth around 7% of GDP in 2020-21, in order to contain the sovereign’s borrowing requirements. The bulk of the government’s liquid fiscal buffers are on deposit with Saudi Arabian Monetary Authority (SAMA), managed as part of SAMA’s foreign currency reserves.
Note the reference at the end to the kingdom’s reserves. They plummeted by around 5% in March. And that is a problem.
Part of the rationale for tapping the debt market for an additional 100 billion riyals is to limit reserve burn, which the finance ministry says could be kept to 120 billion riyals this year. But some quick math is all you need to know that the ~$27 billion reserve decline in March essentially means the kingdom drew down the amount planned for the entire year in the space of just 30 days. Or at least that’s what it sounds like to me.
This can be ameliorated if crude prices stabilize, but that seems like a pipe dream (no pun intended) at this point.
The kingdom’s debt-to-GDP ratio is very low comparatively speaking, but it’s worth remembering that the Saudis, for all their swagger, have a very high breakeven rate when it comes to what price level is necessary to balance the budget. That level for Riyadh is about $80, a figure that stands in stark contrast to the similar figure for Russia.
That’s not to say things are going swimmingly for Moscow either, and according to some industry observers, Russia’s compliance with the cuts isn’t necessarily a sign that everything is “hunky dory”.
Consider the following, from Stephen Brennock, an analyst at PVM Oil Associates:
Russia’s retrenchment will not have been triggered by a sense of loyalty to its OPEC+ peer. Instead, the non-OPEC heavyweight is reacting to its own predicaments. For instance, Russia is expected to have made a loss on exporting Urals crude this month for the first time in two decades. All the while, the country has only eight days of available storage compared to 30 days for the US, according to IHS Markit. The glut in Cushing is grabbing all the headlines but in reality the storage situation is far more desperate in Russia. In short, Moscow is still prioritizing its own interests despite rekindling its partnership with Riyadh.
When it comes to the Saudis, nothing says this has to dead end in some kind of dramatic fiscal fiasco, especially given voracious demand for the kingdom’s debt. But it does suggest that Mohammed Bin Salman either didn’t think things through before flooding the oil market last month or else grossly underestimated the scope of the demand destruction that ended up accompanying the global effort to contain the coronavirus.
As one regional analyst quipped Friday while chatting with me about the outlook for the kingdom in 2020, “It couldn’t have happened to a nicer bunch of people”.
He was referring to the royals, of course. Not Saudi citizens.