Could Saudi Arabia Really Go Bankrupt?

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In October 2015, the International Monetary Fund (IMF) warned Saudi Arabia that the country may run out of the financial assets needed to support spending within five years if planned expenditures are not curbed. Saudi’s fiscal condition has deteriorated rapidly in 2015 because of the roughly 50% drop in the average price for a barrel of oil.

According to the Wall Street Journal, in the summer of 2015 the IMF stated that Saudi Arabia is likely to run a fiscal deficit of about 20% of its gross domestic product, or about $150 billion this year. Oil and gas together account for about 80% of the country’s fiscal revenues. The price drop of this key export commodity is beginning to take its toll on the country’s fiscal condition, leaving some wondering if Saudi Arabia could actually go broke.

The sharp deterioration in the government’s fiscal condition, among other factors, prompted Standard and Poor’s (S&P) to downgrade the country’s credit rating to ‘A+’ from ‘AA-‘ on October 30th,2015. It also prompted the Saudi government to terminate its rating agreement with S&P, as reported in S&P’s press release at the time of the downgrade. (For more information see, Saudi Arabia Disputes S&P Downgrade.)

Oil Glut Until 2020

One primary concern is that Saudi’s key export–oil could be selling cheaply for several years to come. The International Energy Agency (IEA) recently published its 2015 annual outlook where it says the oil market will remain oversupplied by one million barrels per day until the end of the decade. The IEA states that oil demand will increase by less than 1% per year between now and 2020. This is a much slower pace than is necessary to take current excess oil supplies off the market (For more information see, The Economics of U.S Crude Oil Storage Capacity). Worse still, the IEA believes that after 2020, oil demand growth will increase just 5% over the next 20 years (or roughly 0.25% per year). This supply glut could be made worse depending on the timing of Iranian barrels returning to the market, which could keep the price close to $50 per barrel. (For more information see, How Cheap Oil Will Hurt the Saudi Economy

S&P Downgrade

At the end of October, S&P downgraded Saudi Arabia’s credit rating to A+ from AA-. According to S&P, “An obligor rated ‘A’ has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.” Whereas “an obligor rated ‘AA’ has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors [i.e. AAA or risk-free] only to a small degree.” In other words, when Saudi Arabia was rated AA-, S&P believed it was practically certain Saudi would pay its debts on time and in full, whereas now with a rating of A+, this is less certain because of the current “circumstances and economic conditions” facing Saudi Arabia

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