Report notes strong Saudi fiscal 'buffers'

March 9, 2015
Saudi Arabia has fiscal buffers enabling it to cover projected deficits while oil prices are low for at least 4 years and perhaps more than 8 years, according to an analyst at Arab Petroleum Investments Corp., Dammam.

Saudi Arabia has fiscal buffers enabling it to cover projected deficits while oil prices are low for at least 4 years and perhaps more than 8 years, according to an analyst at Arab Petroleum Investments Corp., Dammam.

With other resources, "including a large, untapped borrowing capacity, the country's fiscal power appears almost inexhaustible," writes Ali Aissaoui, APICORP senior consultant in a report published this month.

Many market analysts believe the kingdom's policy of defending oil-market share instead of the price of crude depends on its ability to endure budget deficits while the price is low. Saudi Oil Minister Ali Al-Naimi enunciated that policy after successfully resisting measures to lower oil supply at an Organization of Petroleum Exporting Countries meeting last November (OGJ Online, Dec. 1, 2014).

According to Aissaoui, the Saudi Arabia Monetary Agency, the central bank entrusted with the kingdom's financial surpluses, had net foreign assets of $724.3 billion at the end of 2014. Government deposits, which the analyst calls "most relevant for fiscal operations," totaled $416.2 billion. He used that value as a "narrow fiscal buffer."

Supplementing the narrow buffer are assets of other autonomous government institutions, including pension funds. Those assets total an estimated $335 billion, which together with the narrow fiscal buffer afford a broad buffer of $751.2 billion.

The analyst divides both buffer estimates by a revenue deficiency calculated against expenditures of $229.3 billion projected in the Saudi government's 2015 budget. He bases that calculation on the difference between the $60/bbl average crude price assumed in the budget and a calculated median fiscal break-even oil price of $98.50/bbl.

The break-even price is a function of total budget expenditures; oil production, exports, royalties, and taxes; nonoil tax revenues, and production costs.

The resulting revenue gap is $89.6 billion. Dividing the narrow and broad fiscal buffers by that value gives budget deficit cover of 4.6-8.4 years.

"Saudi Arabia can largely afford current fiscal expenditures," Aissaoui concludes, noting that the kingdom's borrowing capacity enhances its fiscal durability.

"However, the longer oil prices remain depressed, the more depleted the liquid buffer will be and the more likely it is that efforts to maintain fiscal sustainability will become extremely complicated," he adds.