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Will Oil Slump Cause Saudi Arabia to Abandon its Dollar Peg?

Saudi Arabia announced its plan to reduce its record-high $98 billion deficit in the form of spending cuts, increased taxes and privatization, and energy subsidy reforms.

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The International Monetary Fund has warned the Saudi government that continued spending would deplete those reserves within five years.


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Revenues next year are forecast at 514 billion riyals, down from 608 billion riyals in 2015, when oil revenues accounted for 73 per cent of the total.

The finance ministry said any changes to the current prices are aimed at achieving efficient use of energy and conserving natural resources, and would also be structured to minimize the negative effects on lower- and middle-income citizens.

In an effort to drive down oil prices and put rival producers out of business, Saudi Arabia uncapped oil production past year.

The kingdom is expected to see more comprehensive reforms under King Salman’s son Mohammed bin Salman, who chairs the Council of Economic and Development Affairs. Meanwhile, non-oil revenues rose 29 percent to $43.6 billion.

The Saudi 2016 budget is estimated to be based on a $37 a barrel for Brent oil prices and an annual average export level of 7.2 million barrels a day of crude oil, he said. “The budget changes suggest they are expecting oil prices to stay low for some time and the reforms are a small step towards addressing that”.

“This was more detailed than we thought, but it was long overdue”, said Fahad Alturki, chief economist at Riyadh-based Jadwa Investment.

Saudi Arabia is arguably to blame for hurting its own economy because it is a “swing producer”, meaning it produces so much oil that it can shift prices depending on how much of the product it releases to the market. Such subsidies are a highly sensitive issue in Saudi Arabia, where residents have grown accustomed to low utility and fuel costs.

Wednesday’s remarks are Mr. Naimi’s first public comments since OPEC failed to reach any agreement to restrain production earlier this month, leaving members to continue pumping crude at near-record levels into an already oversupplied market.

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Saudi Arabia, along with Iraq, has led the pumping frenzy.

Mideast Saud Arabia Economy