Saudi Arabia in Recession | Cuts Spending to Shrink Deficit

A glut of oil, the demise of OPEC and weakening global demand combined to make 2015 the year of crashing oil prices. The cost of crude fell to levels not seen for 11 years – and the decline may have further to go with Iran’s supplies joining the global supply pool in 2016.

Pressured by low oil prices and costly wars in the Middle East, Saudi Arabia announced a sharp reduction in its 2016 budget to control a worsening deficit, which is steadily draining the kingdom’s financial reserves.

The official Saudi news media reported that the Finance Ministry would cut spending, adopt new taxes and reduce price subsidies for fuel, water and power.

The cost of some grades of domestic gasoline, among the first to be affected, could rise as much as 50 percent, a potentially unsettling spike in a country where mass transit does not exist and cars are a basic necessity.

The IMF has raised the prospect that Saudi Arabia could go bankrupt in five years without changes to its economic policy, cuts in support to foreign allies seem inevitable.

In our next issue – How the Oil powers have been affected

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The price of oil, Saudi Arabia’s most important export, has tumbled this year because of reduced global demand and fierce competition by producers — including the Saudis — to keep their share of the market. The market is expected to be increasingly competitive because Iran could soon be free to sell its oil under relaxed international sanctions after Tehran’s nuclear agreement with world powers. In the summer of 2014, oil exceeded $100 a barrel, but it is now trading well below $40.

The falling price has benefited oil-consuming nations while putting severe financial pressure on exporters like Saudi Arabia, Russia and Venezuela.

At the same time its revenue has slowed, Saudi Arabia has increased military spending, financing rebels in Syria and intervening in Yemen, where Saudi warplanes have been bombing the insurgent Houthi movement since March.

The Saudi kingdom has been spending more than it takes in, and by some estimates it could exhaust its foreign exchange reserves, now roughly $640 billion, by 2020 without deep cuts in spending, a big rise in the price of oil, or a combination of both.

The government ran a record deficit of about 367 billion riyals, or roughly $98 billion, in 2015, according to the Saudi-owned Al Arabiya news channel. Under the 2016 budget, the goal is to reduce the deficit to 326 billion riyals, or about $87 billion.

The Finance Ministry projected the 2016 budget to be about 840 billion riyals, down from 975 billion riyals this year, Al Arabiya reported.

Analysts examining the budget said the Saudis were assuming that a barrel of oil would average about $45 in 2016. But some said even that projection was overly optimistic.

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