Demand for oil, Saudi Arabia’s life blood, plummeted as countries around the world went into lockdown to reduce the spread of coronavirus. Businesses suspended their operations, factories halted production and travel slowed to a trickle.
Saudi Arabia was also involved in an oil price-war with Russia.
"The collapsing oil prices and the dire outlook for energy markets has created a certain amount of worry about the future of the [Saudi] economy," Robert Mogielnicki, a resident scholar at the Arab Gulf States Institute in Washington, told The Media Line, adding that it could now be facing one of its most difficult tests.
"Whether the economy is going to collapse or not depends on how far policymakers are willing to go to make necessary adjustments given the economic constraints,” he said, noting that many oil-dependent economies are teetering on the brink.
Saudi Arabia’s budget has been based on an assumption that oil would be priced at $80 a barrel.
Finance Minister Mohammed Al-Jadaan was quoted as saying: “We began the year with oil prices higher than $60 per barrel; these days, we’re seeing numbers near $20. This huge drop has led to a more than 50% fall in oil revenues.”
Jadaan said last week that government spending would have to be “cut deeply.”
Mogielnicki says the kingdom has few other options for weathering the storm.
"The government has already started to cut expenditures, cutting operational and development expenditures for government agencies and implementing a 5% cut to the budget," he said.
Mohammed Al-Bishi, a Saudi journalist specializing in economics, told The Media Line that the desert kingdom would be able to handle the financial crisis.
"Saudi Arabia has one of the strongest economies in the region, and it is one of the 20 most powerful economies in the world,” he said, noting that it was currently at the head of the G20. “Saudi Arabia is financially strong and can easily survive the crisis."
Despite the massive blow, Bishi insists that the country’s economic foundation is sound.
"It has cash reserves of about $150 billion, and it also has a borrowing capacity,” he said. “Today, the proportion of public debt in the kingdom does not exceed 26%. It can reach 40-50% in such historic circumstances, and I believe that Saudi Arabia has built a good credit reputation over the years that enables it to issue bonds."
Sami Hamdi, editor-in-chief at International Interest, a geopolitical risk consulting firm based in London, told The Media Line the financial crisis caused by the pandemic left the Saudi economy with "little wiggle room" for any new financial problems.
It could survive "until the end of the year, and they may even last another year," he stated.
"Saudis acknowledge that this is a tough time for them. They acknowledge that they are going through a period where they have to diversify their economy,” Hamdi said. “They have to take steps to reform their economy."
Saudi Arabia ran a $9 billion deficit in the first quarter of 2020. Because of its lockdown to fight COVID-19, as well as strict economic measures, the kingdom’s tax revenues fell to an all-time low. It plans to cover most of its expected deficit through borrowing, which it estimates will reach a total of around $58 billion this year.
Jadaan, the finance minister, said the kingdom was considering holding off on some projects, including those in its Vision 2030 plan to diversify the economy and wean the kingdom off its oil dependence.
“Projects, whether major ones or some programs for achieving the [Vision plan]… will have to be delayed,” he said.
In addition to the decline in oil revenues, Saudi Arabia has lost money on pilgrimages to holy sites. The umrah, a pilgrimage to Mecca that can be undertaken at any time of the year, was suspended because of the coronavirus. The hajj, which, according to the Islamic calendar, would come in July this year, might be canceled.
Millions of Muslims make pilgrimages each year.
Mogielnicki pointed to two areas where the Saudi government can reduce expenses.
"One thing I see the government can do, and it’s within their control, is to adjust the budget so they can slash capital expenditures. A huge portion of the country’s current expenditures are allocated toward wages and subsidies. In Saudi Arabia, 50% of current expenditures are dedicated to public-sector wages,” he told The Media Line.
"The power of the public sector, the ability of Saudi Arabia’s government to serve as an engine of growth… is going to be significantly diminished,” he continued. “The government’s ability to shoulder the vast majority of responsibilities for the medium and long term is likely to change unless there’s a major turnaround in some of the market forces and trends."
The crown prince, Mohammad bin Salman, known widely as MbS, has been working to create other sources of income for the kingdom through Vision 2030.
"Diversification was on the table long before MbS became crown prince. It was pushed by Mohammad bin Nayef, MbS’s predecessor as crown prince, and at the time of King Abdallah, who ascended to the throne early this century,” Hamdi told The Media Line.
“Everybody in Saudi Arabia knows that the current economy is unsustainable," he added. “They can't keep surviving on oil as long as the US is promoting shale oil, as long as people are pushing renewable energy. Saudi Arabia knows it can't sit idly by."
However, according to the Arab Gulf States Institute’s Mogielnicki, the pandemic and the low oil prices are a major setback for Vision 2030.
“Saudi officials have already started to hint in public comments,” he noted, “that expenditures on projects, on capital expenditures, could be reduced.”
Hussein Ibish, senior resident scholar at the Arab Gulf States Institute, told The Media Line that because Saudi Arabia was experiencing problems before the pandemic, the ramifications could be much broader than cuts in public expenditures, with operations abroad also affected.
"I think that the Saudi royal family governing group is experiencing a perfect storm of setbacks in 2020,” he said.
“The war in Yemen is going badly, there was a crisis in the demand for oil generally, and oversupply, and [then] the [oil] price war,” he said.
Ibish says the Saudi-led coalition has been scaling down its military operations against Houthi rebels in Yemen for the past two years or so because it was failing.
"But they need to end the war in a way that they can at least secure their southern border. They can't end the war when they are open to missile attacks. They want some kind of understanding with the Houthis to prevent the area from becoming a major foothold for Iran," he said, referring to Saudi Arabia’s archenemy.
Hamdi says that despite the setback in Yemen and the collapse of oil prices, "people in Saudi Arabia are not necessarily blaming [Mohammed] bin Salman for [these troubles]."
He added that Saudi political stability would not be affected by COVID-19 or the economy, although it might be affected by continuing to try to pursue an oil policy that is independent of the United States, the world’s largest producer.
"For the Saudis, oil is more than a commodity,” he stated. “The control of [the flow of] oil is fundamental to the Saudi-US relationship because oil is the weapon that Saudi Arabia uses to protect itself against the US and make sure that the US doesn’t target it."
Despite the strategic relationship between Washington and Riyadh, "this is the key driver of this country's policy with regard to the oil price."
Hamdi says the aggressive oil policy that MbS has undertaken may be the one that brings to an end his ambition to be king.
"If [he] tries to strong-arm the US… in the way he has been doing for the past two months, and tries to force the US to respect the relationship where Saudi Arabia has the oil and the US provides security, that's where the political threat [will come] from. If [he] continues his effort to control the oil market, it may pose a threat to the stability of the kingdom.”
Read more at the Media Line.