This is a guest post by Jareer Elass, an energy analyst who has covered the Gulf and OPEC for 25 years. He is a regular contributor to the Arab Weekly.
As the 2019 budget season approaches, Saudi Arabia has made a point of announcing strong figures for the first three quarters of 2018. In a sign that Riyadh would like to continue this robust economic health into 2019, Saudi Oil Minister Khalid Al-Falih on Sunday announced Riyadh’s plans to cut crude exports by five hundred thousand barrels a day (b/d) next month. This effort would counter any buildup of oil inventories going into next year. The minister made his remarks in Abu Dhabi on the sidelines of a technical market monitoring meeting of the Organization of Petroleum Exporting Countries (OPEC) and other producers including Russia.
The Saudi minister’s statement was meant to signal Saudi Arabia’s desire to push the oil producer coalition towards an agreement to make a new round of oil production cuts at its upcoming full meeting in December. Agreement would help ensure oil prices don’t collapse, particularly as U.S. crude production continues to surge. That strategy, however, could put the kingdom directly at odds with the Trump Administration, which continues to voice concerns about high oil prices. When announcing temporary waivers for Iranian oil sanctions last week, U.S. officials specifically noted the necessity to delay full implementation of the new sanctions to prevent global oil markets from overheating. Some OPEC officials were miffed by the U.S. waivers, which they didn’t anticipate in their calculations earlier in the fall to increase production which is now contributing to the fall in oil prices.
Strong economic showing is important to the Saudi government, which is now benefiting from its smartly conservative budget process for 2018, as well as fiscal reforms that have brought in more non-oil income. The Saudi Finance Ministry reported in its third quarter budget analysis that the kingdom had slashed its deficit by 60 percent from $31 billion to $13 billion in the first nine months of 2018 when compared to the same period last year. The ministry credited substantial growth in both oil and non-oil income. The kingdom’s total revenues for the first three quarters of 2018 grew by 47 percent compared to the same period last year to nearly $177 billion. That included a similarly large jump in oil revenues during the first nine months of this year to $120.5 billion compared to the same period in 2017. Saudi oil revenues rose 63 percent between the third quarter 2017 to third quarter 2018 to around $41 billion, attributable to not only higher oil prices but to the kingdom’s high production rates in recent months.
However, the Saudi government believes the strides made in non-oil income so far in 2018 deserve particular credit. Non-oil income grew 45 percent from third quarter 2017 to third quarter 2018 to total $18.5 billion.
Referring to the third quarter 2018 budget analysis, Saudi Finance Minister Mohammed Al-Jadaan said, “While clearly assisted by improvements in the oil price internationally, these figures also show the fruits of the successful implementation of many initiatives to develop non-oil revenues and improve spending efficiency.”
The Saudi regime reported that even though the deficit had fallen in the first nine months of 2018, government spending rose by 25 percent from the first nine months of last year to nearly $190 billion in 2018. Riyadh highlighted the new Citizen’s Account social benefits system that was established at the end of 2017, as well as higher living allowances and infrastructure spending for the rise.
The Citizen’s Account system covers approximately three million families and 10.6 million beneficiaries -- the equivalent of half of the kingdom’s population – and was intended to blunt the repercussions from fiscal reforms, including reductions in domestic energy-related subsidies and the introduction of both a “sin tax” and a 5% value-added tax (VAT) -- the latter of which was implemented last January. The government anticipated spending as much as $8.5 billion in 2018 in monthly Citizen’s Account payments to recipients, who are comprised of lower- and middle income Saudi nationals. The government does not seem to be planning on curtailing the welfare assistance program in the coming year.
When the Saudi government announced its 2018 budget last December, it had forecast a deficit of $52 billion. But last month, the finance minister reported that the kingdom would see a deficit closer to $39.5 billion. While fiscal reform has certainly helped – including an expected windfall of $6 billion from a year’s implementation of the VAT – the improved deficit benefited from the fact that the Saudi government conservatively based its 2018 budget on a Brent oil price of between $51-55 a barrel. Spot Brent prices are expected to average around $20 a barrel higher than that in 2018.
However, as upbeat as the latest figures are, the Saudi economy still faces challenges ahead that have been exacerbated by the circumstances surrounding the death of Saudi journalist Jamal Khashoggi. In the week ending October 18th, the Saudi Tadawul stock exchange saw sell-offs totaling close to $1.1 billion. The Tadawul continued lose foreign owned stocks the following week before the Saudi government was rumored to have swiftly intervened to restore market stability.
A healthy stock market is one of the central pillars of the Saudi government’s plans to restructure the kingdom’s economy away from a dependency on oil revenues. The Tadawul has been touted as an integral component of the much-awaited initial public offering (IPO) of Saudi national oil company Saudi Aramco. The sudden drop in the Saudi stock market in light of the Khashoggi affair has raised concerns anew about whether the Tadawul has sufficient liquidity to handle Saudi Aramco shares, especially if it could be vulnerable to domestic uncertainties.
Foreign direct investment in Saudi Arabia has also been dropping, reportedly by as much as 80 percent between 2016-2017 – declining to a 14-year-low. Capital flight from Saudi residents has also been on the upswing. According to a JPMorgan report, which was published prior to the Khashoggi scandal, capital outflows from residents in Saudi Arabia was expected to reach $65 billion this year, or 8.4 percent of GDP. However, this figure is notably lower than the previous year’s figure of $80 billion.
Reduced foreign direct investment and increased capital flight would mean the Saudi government will have less flexibility on oil prices. Senior U.S. officials have called on Riyadh to wind down the costly Yemen war, but it remains unclear how events on the ground in Yemen will proceed. As a new U.S. Congress takes its seat and the U.S. president makes his position on oil prices well-known, OPEC is taking a cautious approach to how it communicates about oil prices. In oil markets, all eyes will be on Saudi Arabia as its policies towards OPEC and Yemen will be watched closely.