The Strategist

Low Oil Prices Made Saudi Arabia Look for Loans

03/10/2016 - 15:23

The Saudi government is forced to seek help from foreign lenders to replenish the state’s budget. According to unofficial information, the country’s leaders are negotiating a loan for $ 6-$ 8 billion.
According to Reuters and The Wall Street Journal, referring to unnamed sources, the Saudi authorities are considering a bank loan of $ 6-8 billion. It is reported that the Ministry of Finance has invited major foreign banks to submit their terms on the loan. The Ministry is expected to determine the creditor bank within the next two weeks. If confirmed, this will be the first in the last decade a large loan from a foreign creditor to the Saudi. According to Reuters, negotiations are underway for a five-year loan in dollars with the possibility to increase the credit line. The authorities are not officially commenting on reports of a possible loan.

Against the backdrop of falling oil prices and high public expenditure, budget deficit in Saudi Arabia amounted to $ 98 billion last year. Now the representatives of the oil monarchy are looking for ways to raise funds to replenish the state budget. According to unofficial information, the Saudi government entrusted search for potential lenders to a private consulting firm Verus Partners. The company was founded by several former employees of the US financial corporation Citigroup.

In mid-February, the rating agency S&P lowered the sovereign rating of Saudi Arabia by two notches, explaining it by a noticeable deterioration of the situation with the country's budget and the possible consequences for the economy due to the fall in oil prices. On March 4, Moody`s agency cut the outlook on the oil monarchy’s sovereign rating as well. "They are used to maintain the well-being only with help of oil revenues, - commented Robert Manning, a partner of Atlantic Council analyst firm, in an interview with Marketplace. - They do not want to cut government spending much because they are afraid that this will jeopardize the political stability in the kingdom" .

Fall in oil prices, continuing since the November 2015, has intensified in December 2015. The slip made governments of the oil-exporting countries to revise budgets calculated for the year 2016. Saudi Arabia distinguished itself by the most dramatic change in fiscal policy: December 28, the country’s Ministry of Finance said that they were expecting reduction in income by 15% in 2016. Saudi budget for 2015 was calculated from the price of oil at $ 100 a barrel. The budget for 2016 assumes an average annual oil price of $ 29 per barrel - at least 15% of the costs will be reduced; the budget deficit, previously exceeded GDP by 13%, should be reduced to 2.2% of GDP.

So far, among the oil-exporting countries, Saudi Arabia is planning the toughest cuts just to keep taxes unchanged. Kuwait, a major rival of the Saudis, in December announced reduction of budget deficit by only one-third. The country also declared adjustment of the tax on income for legal entities-residents and non-residents, which will give additional income by nearly the same amount abbreviated (about $ 5.5 billion).

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