Business & Economy

Saudi Arabia, between resistance to low price and coronavirus fight

By Omnia Al Desoukie

Dubai, Mar 22 (efe-epa).- Saudi Arabia’s efforts to sink oil prices during its dispute with Russia represents not only a resistance battle between both countries but also an economic endurance test for Saudi finances at a time of global uncertainty due to the coronavirus.

?With the oil price hovering at $26, less than half of its worth a month ago when the global economy started to scale the coronavirus impact, Saudi Arabia has put the country under quarantine.

?The country, with $500 billion in foreign reserves, is expected to make cuts in its expenditure in the wake of the plummeting oil prices and the revenue lost due to the suspension of the Muslim pilgrimage.

?On Wednesday, Saudi Arabia said it would cut spending by 5 percent, or about $13.3 billion, a move to offset the impact of low oil prices and the expected economic effects of the pandemic.

A day later, The Saudi Arabian Monetary Agency (the Central Bank) announced a support package worth 50 billion riyals ($13.3 billion) to support the private sector and provide banking facilities for small and medium businesses.

On Friday, Saudi Arabia announced measures exceeding 120 billion riyals ($31.93 billion) to reduce the impact of the virus on the private sector, especially small and medium enterprises.

“At present, global financial markets are still interested in a possible Saudi request for bond issues or other financial options,” Global Head Strategy & Risk of Berry Commodities Fund Cyril Widdershoven said.

“With a very cheap credit at present, the costs for the Kingdom will be relatively low, keeping the GIGA projects afloat and preparing the Kingdom to get back on its feet in a more diversified economy.”

The Energy Intelligence, which adjusted their external break-even oil prices and the average for 2020 to $63 per barrel, considers that this strategy could be risky for the Saudis.

“Saudi Arabia can cover its deficits by draining foreign exchange reserves and by borrowing. But at the current price levels, it would burn its currency reserves at an ever faster rate as revenue falls,” the US-based intelligence company said. ?

Before the fall in oil prices, Saudi Arabia predicted a $50 billion deficit in the 2020 budget, which represents 6.4 percent of the Gross Domestic Product.

In an extreme scenario with the Brent being traded at around $40 per barrel, the deficit could jump into $80 billion. ?Russia, by contrast, can be more resilient to lower oil prices due to its flexible exchange rate and large currency reserves, according to the US company.

“Saudi Arabia, and the UAE, also did not want to shoulder the total production cut, leaving Russian parties open to get more market share and supporting US shale,” Widdershoven said.?

“By opening up the floodgates, Saudi is now really targeting Russian oil markets in the EU, USA and elsewhere.”

The question is who will be the first to pull out of this endurance war.

“The first to blink will be most probably Moscow,” Widdershoven said.?

The Saudis need to find some “common ground” with Moscow again which could be hampered by the kingdom’s “ambition” to regain the oil market share that they have lost for years. EFE?-EPA

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