Saudi Stocks Plunge Third Most In 11 Years After Finance Minister Warns Of ‘Painful’ Adjustments

Saudi shares plunged the most since early March in the wake of foreboding comments from finance minister Mohammed Al-Jadaan, who underscored the magnitude of the crisis facing the kingdom in an interview with Al-Arabiya over the weekend.

“The kingdom hasn’t witnessed a crisis of this severity over the past decades”, he said, adding that the government will need to adopt “very tough and strong measures” which will be “painful” even as they are “necessary”.

He reiterated plans for borrowing some 220 billion riyals in 2020, an amount which would see the Saudis tapping the debt market for the most since their debut in 2016.

 

“Due to the precautionary measures [to contain the pandemic] non-oil revenues will be dropping as there is a huge reduction in economic activity”, he went on to say, noting that the kingdom is doing its best to confront the problem “wisely and efficiently”.

Local stocks were not amused. They “wisely and efficiently” dropped a harrowing 7.4% on the session, the worst day since back-to-back deep swoons in March and the third worst session since late 2008.

Aramco plunged more than 5% for its third worst day since going public. It’s been weeks since the behemoth traded above its IPO price of 32 riyals.

Ultimately, Al-Jadaan’s remarks appear to presage deep spending cuts, and you might be inclined to suggest his tone was more somber than that adopted in previous addresses.

Indeed, that seems to be the consensus from local analysts.

“The change in tone is stark”, Dubai-based Hasnain Malik of Tellimer said. “While his comments do not highlight any new risks, they are a reminder to some of those in the equity market who mistake a turn in oil prices, from a very low level, with a fix for all of the kingdom’s challenges”.

Obviously, there are mounting concerns about a prospective devaluation given the acute nature of the double-barreled crisis. The kingdom needs roughly $300 billion in reserves in order to ensure the market doesn’t lose faith in Riyadh’s ability to maintain the peg.

As documented extensively here, reserves tumbled 5% in March to a nine-year low. If you ask Goldman, crude should recover to around $40 later this year, on the way to $60 by year-end 2021. If that turns out to be accurate, the kingdom’s reserves won’t dive through the level of narrow money (i.e., M1). However, if crude prices were to stay at $30 for a prolonged period, a devaluation may be in the cards.

For now, the bank says the better option is further fiscal retrenchment, although Goldman acknowledges that comes with “economic [and] sociopolitical costs”.

Full transcript of Al-Jadaan’s interview with Al-Arabiya

Al Arabiya: Welcome dear viewers to our exclusive interview with Saudi Arabia’s Finance Minister, Mohammed al-Jadaan.

Welcome Your Excellency. Thank you for providing this opportunity. We will try during this interview to clear up the economic and financial effects of the coronavirus pandemic on the Kingdom, the procedures you have taken, and talk about the upcoming procedures you will be taking to face this crisis.

I will start with some of the first quarter results, which suggest that [Saudi Arabia’s public] debt has not been financed by withdrawing from government reserves, but through foreign borrowing [instead]. SAMA [the Saudi Arabian Monetary Authority] has seen a drop by 100 billion riyals ($26.62 billion), which is the biggest monthly in two decades, to reach its lowest points since 2011.

What is your explanation of that?

Al-Jadaan: Thank you Nasser, greetings to you and the viewers. The Kingdom of Saudi Arabia, thanks be to God, has faced this crisis from a position of strength. The Kingdom has taken several steps during the past several years, based on Saudi Vision 2030 [reform plan] and on the wise leadership of the Custodian of the Two Holy Mosques [King Salman bin Abdulaziz] and the Crown Prince [Mohammed bin Salman].

We have taken steps to diversify the economy — a journey that began four years ago, and one which has many years left to go. We have also taken steps in relation to public finance controls and controlling the budget deficit. And thanks be to God, we witnessed great positive results at the end of 2019. But at the beginning of this year, the global [coronavirus] pandemic emerged with huge health and economic impacts. Thankfully, the Kingdom and the government have been able to take firm and quick steps to maintain the safety of people and citizens, and to provide resources to the health sector.

The results of the first quarter have certainly not shown the pandemic’s impact on a significant level. The precautionary measures taken by the government, and the significant results of those steps on the economy and on public financing, both globally and within the Kingdom, these will show in the second, third and fourth quarters depending on developments in the health and economic [sectors]. The Kingdom is committed to the task of sustaining public financing, and is committed to having enough financial strength to face this crisis even if it is prolonged.

We have taken several steps both in relation to health, and in relation to financial measures in terms of reducing expenditure. Right now, we are looking at what we can do to reduce the deficit level. Certainly, there has been a significant drop in revenues, and we will likely see its impact in the coming quarters. Take oil revenues. We began the year with oil prices higher than $60 per barrel; these days we are seeing the numbers near $20. This huge drop leads to oil revenues dropping by more than half. Non-oil revenues will also be dropping due to the precautionary measures, which have caused a huge reduction in economic activity and as a result, non-oil revenues will drop. We have to deal with this wisely and efficiently and, God willing, the Kingdom will be looking at the several options it has in front of it to face a pandemic the world has never seen the likes of for more than 70 years, since nearly World War II. Globally, a pandemic at this level has never been seen before.

Al Arabiya: Lots of countries, including Saudi Arabia, have taken several economic, financial and monetary measures [to combat the impact of the coronavirus]. There were stimulus packages in the Kingdom which reached 120 billion riyals.

Could you summarize to us the most prominent items of these stimulus packages?

Al-Jadaan: Certainly. The Kingdom has — with clear orders from the Custodian of the Two Holy Mosques and the leadership of His Highness the Crown Prince — established several task forces to face this crisis, both in the health sector and the economic and financial sectors. It has also taken several measures to support the economy with the main aim of protecting the jobs of citizens in the private sector, [supporting] the necessary services, and providing financial and other resources for the health sector. We announced a set of packages that have exceeded nearly 180 billion riyals, which represents 8 percent of the non-oil domestic product. This is a huge amount of support for the economy.

We also have a set of initiatives, which are currently being studied, to support the private and health sectors. But at the same time, we have also taken steps to reduce expenditure. As you know, revenues have seen a huge drop and are expected to continue dropping throughout the year, and perhaps even [during] the beginning of the next financial year, and we have to be prepared economically and financially to face this pandemic and the acute and painful impact on the people and the private sector…

Al Arabiya: Recently, you said you will also try to curb [Saudi Arabia’s public] debt. And now you’re discussing, to my understanding, possibly rationing part of the spending in some sectors and other financial items. Can we say that the Kingdom is on the verge of taking strict measures to limit spending?

Al-Jadaan: Certainly. While facing such a crisis, which the world has not seen before… the Kingdom has not faced such a crisis — neither health wise nor financially — for decades at least. Therefore, the government must take different measures than it previously has. There must be a limit on spending, redirecting [some spending] to provide health services for nationals and residents. And [we must] face the impact of this major shock in return, [including potential] major limitations on people in terms of restricting movement and economic activities. Therefore, [the crisis will have] repercussions on demand for raw materials including petrol, and a major drop in prices. Of course, the government is considering different options. The government has decided to reduce some spending as of now, but this is not enough. It decided to authorize more than what was planned for. The plan was to take a 1.2 billion [riyal] loan from the markets. Now we will take a larger loan, nearly 100 billion riyals more. This is also not enough to cover the debt. Therefore, it is important to observe the budget’s spending list and to choose the least damaging and most effective [measures] to benefit the economy and the people and the main services provided.

Al Arabiya: What should we expect then, Minister? What items will be affected by this expected decrease?

Al-Jadaan: The list is extremely long. Of course, we are considering delaying some projects. Naturally, as a result of the precautionary measures, we will reduce spending on them. Projects, whether major ones or some [of the] programs [aimed at] achieving [Vision 2030], that are, in their nature, as a result of the precautionary measures, now delayed in implementation, and therefore [resulting in] a reduction in spending. There will be some spending that will naturally be reduced, such as travel expense, duties, etc. However, we are also considering other items, and as long as we do not touch basic necessities of the people, all options are open. The government is currently studying the effect of these options and will therefore decide based on [its findings], and we will make recommendations soon.

Al Arabiya: So, can we say the Kingdom will be tightening the belt soon, and what if the belt is not tightened? What will be the results?

Al-Jadaan: [We are now] facing an extreme crisis that affects both [demand and revenue]. In terms of demand, everyone has reduced their economic activity to limit the harmful effects of [the spread of coronavirus] on people and their health – therefore sacrificing, to a greater limit, economic activity in the interest of citizens and residents. The other side [is that], as a result of these measures, revenues have majorly decreased. Therefore, it is very important to take strict and extreme measures, which may be painful, but are necessary for public financial stability. We have also learned that economists, health experts, and epidemiologists have not yet been able to predict the duration of this pandemic and its extreme economic effects that we are witnessing.

Therefore, we must be prepared to face the continuation of this crisis and to have the financial ability, within the limits of possibility, to provide necessities to the people. Therefore, yes, we must extremely reduce budget spending. We are looking into several options now, both related or unrelated to [existing] projects and other expenses.

Al Arabiya: But Minister, this is not the first time Saudi Arabia has faced an economic crisis. It faced crises several times before, and it took extreme financial measures to face these challenges. However, shortly after [the crises passed], the Kingdom retracted those measures. Were some of those measures excessive, in your opinion — the previous measures? And will we go through that again this time?

Al-Jadaan: The measures taken by the government show a great ability to take decisions at the right time before it is too late. We do not want to be late. There is no excess. The entire world is witnessing a crisis it has not seen before. The Kingdom has not witnessed a crisis over the past several decades that is this extreme, whether relating to its health aspect or its financial or economic aspects. Many economic sectors have been majorly affected on a global level, as well as on the Kingdom’s level. Public finances have been largely affected on a global level. The Kingdom was affected on a larger scale because it largely depends on oil.

The Kingdom’s Vision 2030 attempted to solve this issue by diversifying the source of revenue of the economic activity. However, it is a journey that has started but is not finished. We must [still] largely rely on oil revenues, and as long as oil revenues have majorly decreased — by more than half — and [considering] non-oil revenues have also decreased as a result of many of the Kingdom’s economic sectors being disrupted, we must therefore be careful and firm in managing public finances to be able to continue providing basic necessities in case this crisis continues.

Al Arabiya: Media reports have talked about several Saudi Arabian investments abroad, including sea tourism companies, football clubs, European oil companies — why these investments at this time, Minister? And why not conserve these investments as cash flow that the Kingdom might need during this crisis?

Al-Jadaan: Good question. I think it is important to clarify that the government manages the public funding in a discreet and efficient matter. We have reserves, if we can see from the past five years — if we didn’t have these reserves, we would have faced major crises. [Instead,] we used these reserves to curb the budget deficit. We spent over 1 trillion riyals during the four [or] five previous years to cover the deficit. We also used part of the revenues from our investments. The investments are highly important because they have returns we can use in case of a crisis to curb the deficit. If we use the reserves, we consume the assets and won’t have any returns. Also, these types of crises create investment opportunities. Many companies reduce their investments, which creates opportunities to invest in them, therefore achieving returns that curb the budget deficit over the coming years.

Al Arabiya: What are your expectations for oil prices by the end of the year, in light of the historic agreement that OPEC+ has reached and the agreements in this arena within the framework of the G20, which the Kingdom is chairing this year?

Al-Jadaan: My dear brother, I will not enter into expectations as to the price of oil. This is a matter that is regulated by supply and demand, and the oil markets are the ones that set the prices. However, certainly the major shocks to the global economy regarding the demand for basic goods including oil pushes greatly on the demand [for oil] and therefore on the oil prices. I predict that the economic shock will continue for an amount of time that is not short. The economic situation in the world is fragile, and it is very difficult to predict precisely when the economy will return. Therefore, it is very important to have faith in God and plan for the worst, because a prudent government needs to plan for the worst even though it is optimistic and ask for God’s favor. But, we have to plan for the worst case scenario and take matters seriously, and we are tightening the belt greatly as I said, so we can continue providing basic services for our citizens and manage and operate the government for years in the eventuality that the crisis continues for many years to come.

Al Arabiya: Internal lending, Your Excellency, in the first quarter reached 27 billion riyals. However, international lending reached 19 billion riyals, and of course, you issued international bonds in April for about 7 billion dollars. My question is: Will there be a greater dependence for the remainder of this year on international issuing more than the local issuing? In order not to compete with the private sector on the sources of financing in the Kingdom, and as you know the private sector is in great need now for this finance potential.

Al-Jadaan: I want to first stress that liquidity in the banking sector is very high, and we have seen in reports from international monetary organizations that we do not have challenges in bank liquidity, and the [Saudi Arabian Monetary Authority] and the banks are capable of managing liquidity and providing [for] the needs of the private sector. Second, the government is eager through the National Center for Debt Management not to compete with the private sector, but we will continue to issue locally and internationally based on the conditions in the market and the cost of [public] debt. It is very important that we are alert and conscience that the cost of debt does not increase, because an increase in the cost of debt is not only harmful for public financing and the cost of servicing loans in the future, but is also bad for the economy — because an increase in the cost of debt for the government increases the cost of debt for companies, and even for citizens through their mortgages and consumer loans. We therefore need to make sure that the cost of debt does not increase. But we will continue to take loans, and we have seen high demand [for] the government debt securities, internally or externally. As per the plan, we will take loans up to 220 billion, as per the conditions in the market and the available liquidity.

Al Arabiya: My last question, Your Excellency, what [about] after the pandemic? Will things go back to as they were, or do you think that conditions before coronavirus are not like what will come after the coronavirus, in terms of the economic and monetary situation in the Kingdom?

Al-Jadaan: The crisis that we are now seeing is one we have never experienced before, and the economic, public finance challenges that we are seeing are great. I do not think that the world — let alone just the Kingdom — I do not think that the world or the Kingdom will go back to pre-coronavirus conditions, because there have been many economic changes, both in normal economic activities and supply chains. And in the prices and costs of services and materials. I believe there are challenges that we are monitoring closely, and as I said in the press conference a week or 10 days ago, there are teams that are working day and night to identify these risks and find opportunities that we can utilize. This is from one side. From the other side, the country depends largely on public finance. The Saudi economy still depends greatly on public spending and therefore we have to maintain public finance so we can continue to support the economy for the years to come. Public finance needs to be regulated more. The government has worked over the last four to five years to regulate public finance and lower the deficit, but we still have a long way to go. We will reduce expenditure, God willing, even if some of the steps taken will be painful, they are for the benefit of everyone, for the benefit of the country and for the benefit of its citizens. We are looking forward to the concerted effort of citizens and the private sector and the government to face this crisis. We will surpass it, God willing, and we are strong and we will come out of it, God willing, stronger than when we entered it, but it is a crisis, and a crisis that might be prolonged, and we will need to deal with it on this basis.

Al Arabiya: We thank you, Your Excellency Minister Mohammed al-Jadaan, for all these details and explanations.