Moody's: How the oil price rout will affect Saudi Arabia's economy

Jessica Morris
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Saudi Arabia's currency peg is becoming more expensive to maintain (Source: Getty)

Saudi Arabia will be faced with tough choices when it comes to spending cuts if oil prices fail to recover in the medium-term.

Oil prices have fallen around 75 per cent from a high of over $100 per barrel in June 2014. This has heaped pressure on the balance sheets of oil producing nations, such as Saudi.

The de facto Opec leader has been using the massive foreign exchange reserves it built up during the good times to weather the oil price rout. Consequently, they fell from a high of $746bn in August 2014 to under $620bn by the end of last year, according to a new report by credit ratings agency Moody’s.

Saudi began issuing debt in mid-2015 to slow the losses, however defending its 31-year old currency peg requires the use of foreign reserves. The peg ensures its riyals move in line with US dollars to smooth the effect of oil price swings on the non-oil economy.

But pegs can be costly to maintain, especially when a country has significant domestic and external imbalances, as Saudi does now. Maintaining the peg will erode the country’s capital buffers and lead to a build up to debt, Moody’s said.

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Moody’s expects Saudi Arabia to post fiscal deficits of around 12 to 15 per cent of gross domestic product over the new two years, compared to a 10 per cent surplus on average in the two years before the oil price decline.

Similarly, it expects a current account deficit of between eight to 12 per cent of gross domestic product during this period, compared to a 20 per cent surplus on average in 2012 and 2013.

And as this happens, emphasis will shift to Saudi Arabia’s fiscal consolidation effort.

"As it stands, Saudi Arabia's 2016 budget allocates 25 per cent of its spending on military and security spending alone."

"The extent to which the Kingdom decides to keep these policies up and at what cost to its fiscal and macroeconomic profile will be an important credit consideration."

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