Dubai — Saudi Arabia's balancing act of extending the OPEC/non-OPEC output cuts into the first quarter of 2020 and maintaining economic growth is being tested by weaker oil prices, with concerns of a potential economic contraction.
Not registered?
Receive daily email alerts, subscriber notes & personalize your experience.
Register NowThe world's biggest oil exporter needs an oil price of over $85/b to balance its 2019 budget of Riyal 1.106 trillion ($294.91 billion), the biggest in its history.
The Institute of International Finance estimates Saudi Arabia's fiscal breakeven Brent oil price to be $89.5/b, while the International Monetary Fund pegged the price at $85.4/b in an April report.
Currently, Brent oil price is hovering around $65/b and S&P Global Platts Analytics forecast the price to average $69.6/b this year.
The kingdom's fiscal deficit is projected to reach 4.2% of the gross domestic product in 2019, compared with 4.6% in 2018, according to the country's Ministry of Finance.
After oil prices plunged from around $115/b in mid-2014 to around $40/b in mid-2015, Saudi Arabia posted its biggest-ever fiscal deficit of Riyal 367 billion, prompting the kingdom to undertake a series of reforms in 2016. The year was marked by a supply cut agreement between OPEC and non-OPEC members to prop up oil prices.
The global oil output cuts and ensuing higher oil prices have helped Saudi Arabia return to growth in 2018, after the country's GDP contracted 0.74% in 2017.
For 2019, the country's ministry of finance forecast a GDP growth of 2.6%, but economists are not so sure. In the first quarter of this year, GDP grew by 1.66%, compared with a growth of 3.6% in the fourth quarter of 2018, according to the General Authority for Statistics of Saudi Arabia.
Saudi Arabia pumped an average of 10.76 million b/d of oil in Q4 2018, according to S&P Global Platts survey figures, as the OPEC/non-OPEC alliance boosted output in the second half of that year.
Meanwhile, oil prices reached a four-year high of over $86/b in early October 2018 followed by US slapping sanctions on Iran's oil industry in November.
"For headline GDP to reach 2.6%, it means oil GDP has to grow by 2.5%, corresponding to around an average level of production of 10.6 million b/d in 2019," said Mohamed Bardastani, senior economist for the Middle East at Oxford Economics, adding that the production is unlikely to pick up in H2 given the extension of output cuts.
Saudi Arabia pumped on average 9.93 million b/d in the first six months of 2019, below its quota of 10.31 million b/d under the global oil output cuts. OPEC's biggest oil producer made up for increases from members producing above their limits.
The 9.93 million b/d production figure compares with 10.35 million b/d average of production in 2018 and 9.97 million b/d in 2017, according to Platts survey.
Going forward, Saudi Arabia's oil minister Khalid al-Falih has said the kingdom will not over-comply to the extent it did previously with OPEC/non-OPEC collective cuts of 1.2 million b/d.
POTENTIAL GDP CONTRACTION
The extension of the deal last month and the lackluster performance of the non-oil sector means that Saudi Arabia's GDP could contract in the third and the fourth quarter of 2019, according to Jason Tuvey, senior emerging markets economist at Capital Economics.
In both quarters, the pace of contraction may average 0.3%-0.5% mainly due to oil production cuts, and the resulting weakness in the oil sector, Tuvey said. In Q1 2019, the oil sector grew 1.04% compared with 5.96% in Q4 2018, data from the General Authority for Statistics showed.
Meanwhile, the non-oil sector is not growing fast enough despite government measures that range from a stimulus package to privatization efforts such as plans to sell a 5% stake in the state-owned Saudi Aramco. Non-oil growth reached 2.13% in Q1 2019 compared with 2% in Q4 2018.
However, several economists expect the Saudi Arabian economy to grow in the second half of 2019 despite the output cuts.
"Saudi crude oil production will remain at around 10 million b/d for the rest of the year," said Garbis Iradian, chief economist for the Middle East and North Africa region at Washington-based IIF.
"This implies that average crude oil production for this year would be 1.5% lower than the average for 2018. Assuming that non-oil real GDP grows by 2.5% in 2019, then the overall growth would be 1.3%," Iradian added.
The economic pendulum between oil and non-oil growth is swinging at a time when oil security concerns have been exacerbated by tensions in the Persian Gulf.
SECURITY CONCERNS PRESSURE BUDGET
Saudi oil tankers were the subject of attacks near the UAE port of Fujairah in May, the same month when Yemen's Iran-allied Houthi rebels targeted a key Saudi oil pipeline linking the energy-rich eastern region with the western port city of Yanbu.
These attacks, as well as the targeting of an airport and desalination plant in Saudi Arabia in June, among others, have escalated tensions in the Persian Gulf region, especially after the downing of a US drone by Iran last month. But the kingdom is unlikely to enter another war.
"A full-blown war with Iran is by no means something the Saudi political leadership wants," said Torbjorn Soltvedt, principal MENA analyst at the UK-based Verisk Maplecroft, adding that the war in Yemen is costing Saudi Arabia tens of billions of dollars every year.
Although the 2019 military budget is expected to drop 12% to Riyal 191 billion, actual expenditure could be higher as was the case in 2018, when the estimated Riyal 218 billion military expenditure ballooned to Riyal 228 billion.
The military budget was the single biggest budget item, accounting for 25% of total spending in 2018.
Saudi Arabia, which has so far avoided serious belt-tightening, will remain heavily dependent on oil revenue for economic and political stability for the foreseeable, Soltvedt added.
--Dania Saadi, dania.el.saadi@spglobal.com
--Edited by Kshitiz Goliya, kshitizgoliya@spglobal.com