Saudi Arabia gears up to tackle economic challenges

Saudi Finance Minister Mohammed al-Jadaan warned that “total GDP is going to be significantly less than what we have forecast.”
Saturday 05/10/2019
Saudi Finance Minister Mohammed al-Jadaan attends the Euromoney conference in Riyadh, September 18. (AFP)
Assessing prospects. Saudi Finance Minister Mohammed al-Jadaan attends the Euromoney conference in Riyadh, September 18. (AFP)

Working overtime to recover its crude production and exports following attacks on oil infrastructure and pressing ahead with plans for state energy giant Saudi Aramco’s initial public offering, Riyadh is pushing back against unwelcome and untimely economic developments.

Financial figures released September 30 by the Saudi government indicate a deep slowdown in the kingdom’s economy, raising concerns about the Gulf nation’s fiscal health while a major credit rating agency downgraded its sovereign rating for Riyadh after the September 14 attacks on the Abqaiq processing plant and the Khurais oil field.

Figures released by the Saudi Finance Ministry did reveal a bright spot: the country’s non-oil economic growth expanded nearly 3% in the second quarter of 2019, the fastest that sector had grown in four years. The growth was attributed to a strengthening in private-sector activity backed by the kingdom’s chief sovereign fund, the Public Investment Fund.

The kingdom’s overall GDP grew 0.5% in the second quarter from the same period a year ago and plunged from 1.66% growth in the first quarter of this year. Saudi Arabia’s oil GDP declined 3.02% in the second quarter, a reflection of the kingdom’s participation in crude production cuts it helped orchestrate with other OPEC members and independent oil producers known as OPEC+.

Revised forecasts for Saudi economic growth paint a bleak picture, raising questions of whether the country is approaching an economic recession.

Saudi Finance Minister Mohammed al-Jadaan warned that “total GDP is going to be significantly less than what we have forecast.” He insisted the attacks on Saudi oil infrastructure would have “zero” effect on revenue and pointed to the Gulf producer’s lower oil output as the primary reason for a less robust economic performance in 2019.

Two leading global credit rating agencies, Moody’s Investors Service and Fitch Ratings, weighed in with their assessments of Saudi Arabia’s economic health. Moody’s estimates the kingdom’s real GDP will grow 0.3% in 2019, down from its forecast earlier in the year of 1.5% growth.

Moody’s discounted the effects of the attacks on Abqaiq and Khurais for contributing to the economic downturn within the kingdom and instead attributed Saudi Arabia’s decision to underproduce from its agreed-upon OPEC+ quota as influencing GDP growth.

Fitch Ratings had a much more dire view of Riyadh’s fiscal situation and directly linked the attacks on Saudi oil infrastructure to its decision to downgrade its sovereign rating for the kingdom from “A+” to “A” with a Stable Outlook. The rating agency pulled no punches, saying: “We believe that there is a risk of further attacks on Saudi Arabia, which could result in economic damage.”

Fitch Ratings assessed that “Saudi Arabia is vulnerable to escalating geopolitical tensions given its prominent foreign policy stance, including its close alignment with US policy on Iran and its continued involvement in the Yemen war.”

Fitch credited Saudi Aramco’s speedy restoration or substitution of lost production as “demonstrating resilience to the attacks” but also highlighted the kingdom’s “continuing fiscal deficits” as contributing to the sovereign rating downgrade.

The Finance Ministry addressed the agency’s sovereign rating demotion, stating it was “disappointed that Fitch took a swift decision to downgrade the kingdom.”

Referring to the mid-September attacks, the ministry said: “The event highlights Saudi Arabia’s outstanding capacity to effectively deal with adversities, commitment to maintaining stability in the global oil markets and the Kingdom’s status as an important international ally.”

The ministry called the sovereign ratings downgrade “somewhat speculative.”

The Finance Ministry underscored that the country’s oil supply was “fully back online,” with the kingdom attaining 11.3 million barrels per day (bpd) of crude production capacity and the goal of reaching 12 million bpd in November. Crude production is expected to recover to 9.89 million bpd in October.

The ministry noted that “the response and resilience of the company and the markets underline the reliable nature of the supply of oil for global markets from the kingdom.” The ministry hoped “the agency will see fit to revise its decision in the light of continuing stability within the supply to markets.”

The sovereign rating downgrade is a blow to the Saudi government, which recently stepped up the pace of preparing for the Saudi Aramco initial public offering (IPO). There are reports that the state oil and gas firm will announce its IPO plans in late October.

One scenario has Saudi Aramco listing 1% of its shares on the Saudi domestic exchange, the Tadawul, by the end of this year, followed by another 1% on the domestic bourse in 2020 and up to 3% floated on a foreign exchange either in 2020 or 2021.

A phased sale on the Tadawul would ensure the relatively small domestic bourse would not be overwhelmed. The front-runner for the foreign exchange increasingly appears to be the Tokyo Stock Exchange, which is heavily courting Saudi Aramco for the listing. There are rumours about a push within the Saudi top leadership for a 10% listing of company shares.