Saudi Arabia feels the squeeze

The slide in the oil price has “blown a hole” in Saudi Arabia’s budget, says Tim Maverick on Wallstreetdaily.com. It needs an oil price of more than $100 a barrel to balance its books and keep a restive and cosseted population happy: in 2014, annual energy subsidies per person in the 29 million-strong population came to $3,400. Last year the budget deficit reached 15% of GDP; this year it is expected to hit 13%.

The government has cut back, but still faces a “vicious liquidity squeeze”, says Ambrose Evans-Pritchard in The Daily Telegraph. It has trimmed subsidies, borrowed £27bn on the domestic market, announced its first international bond issue since the 1990s and tapped global banks for £10bn. But it has continued to hoover through its big foreign exchange reserves at a rapid rate.

In the summer of 2014 these totalled $740bn; now that figure is $582bn. Burning through the cash pile tends to tighten monetary policy, as there is less money in the overall system. It is getting more expensive for banks to lend to each other.

Meanwhile, there have been reports that the government is to pay suppliers with IOUs in order to conserve cash. A further problem is that Saudi Arabia has pegged its currency, the riyal, to the dollar for decades. Breaking the peg would ease the squeeze on revenues in riyal terms – but at the cost of political credibility and a jump in inflation. Saudi Arabia is in for a rocky ride.