Saudi Arabia’s dependence on Aramco

Saudi Arabia's dependence on Aramco

Saudi Arabia’s dependence on dividends paid by state-controlled oil giant Aramco to delay spending cuts is not sustainable and the kingdom may face challenges to keep its debt/GDP ratio under control. Saudi Arabia will only be able to deliver a balanced budget in 2023 as the economy struggles with the impact of coronavirus. Saudi Arabia has recently published its 2021 pre-budget statement with the final version to be released in December. In it, Saudi Arabia expects a budget deficit in 2020 close to 12 percent, declining to 5.1 percent of GDP in 2021, and be balanced only by 2023. The kingdom has also adjusted its overall spending for 2020 by about 2 percent of GDP as the planned spending cuts – such as cancellations and delays to projects, cuts in operating expenses, the suspensions of the cost of living allowance – will be offset by the additional spending on healthcare and supporting the domestic economy amid the ongoing challenges posed by the global pandemic.

On April 2021, Saudi Arabia was in talks to sell one per cent (1%) of state-backed oil giant Saudi Aramco to a « leading global energy company, » the kingdom’s crown prince told a Saudi-owned news channel. « I don’t want to give any promises, but there’s a discussion for the acquisition of a 1% stake by a leading global energy company, » Crown Prince Mohammed bin Salman said in an interview on Saudi television. « That will be a great deal to enhance the sales of Aramco in the country where this company (is based), » he said. The prince did not name the company but said it is from a « huge » country. He also said there are discussions with other firms, and some Aramco shares could be transferred to the kingdom’s sovereign wealth fund, the Public Investment Fund. Some shares may be listed on the Saudi market as well. The interview marked the fifth anniversary of the Saudi Vision 2030, a multi-billion dollar plan aimed at diversifying the country’s economy away from oil reliance. Saudi Aramco was the world’s biggest IPO when it went public in December 2019, and listed around 1.5% of its shares on the local stock exchange, the Tadawul. The initial public listing raised $25.6 billion, and the company later exercised its « greenshoe option » to sell 450 million more shares, bringing the total size to $29.4 billion. The Saudi government owns more than 98% of Aramco’s shares. Saudi Aramco is pressing ahead with a planned $75 billion in dividends this year, despite the slide in profits and rising debt as the kingdom battles a widening budget deficit. The kingdom expects a rebound in government revenue in 2021, and a 12 percent decline in government spending over the next three years, viewing 2020 as a one-off, without any impact in the medium-term. The higher government revenue is assumed to come from the high dividend paid to the state by the national oil company, enabling Saudi Arabia to delay large spending cuts. However, it is not a sustainable solution after next year as oil prices remain low and the cash buffers of the national oil company are eroding. Saudi Arabia will continue tapping the market to maintain an adequate level of reserves and diversify its investor base. In August 2020, Saudi Aramco said it was pressing ahead with a plan to pay $75 billion in dividends this year even as profit slumped and debt surged. Saudi Arabia generates most of its revenue from crude and its budget deficit of 12 percent would be the widest since 2016, adding pressure on Aramco to maintain dividend payments. Aramco’s rivals including BP and Royal Dutch Shell have cut their dividends. It remains important that the spending cuts envisaged in the budget are implemented closely, delivering the fiscal deficit re-duction and keeping the debt/GDP below 40 percent, which is material for the rating. However, it will prove challenging in a weak economic environment with low oil prices. That while Moody’s does not challenge the kingdom’s A1 rating yet, it maintains the outlook on negative, expecting the fiscal deficit to remain wide.

The point come as Saudi Arabia grapples with soaring inflation during the third quarter of 2020, reflecting the impact of higher VAT since July. The VAT, introduced in 2018, was increased to 15 percent from 5 percent. Latest data from the General Authority for Statistics (GaStat) showed that prices rose by 5.7 percent year-on-year in September, and declined by 0.2 percent month-on-month. Saudi Arabia’s finance minister in May announced that the kingdom would triple its value added tax and halt monthly handout payments to citizens in new austerity measures amid record low oil prices and a coronavirus-led economic slump. At the time, Mohammed Al Jadaan warned of « painful » and « drastic » steps to deal with the double shock of coronavirus and record low oil prices. Saudi Arabia, the top crude exporter and the Arab world’s biggest economy, shut down cinemas and restaurants, halted flights, and suspended the year-round umrah pilgrimage in a bid to contain the deadly virus. Saudi Arabia has extended by three months a stimulus program to help businesses still struggling to recover from the effects of Covid-19 but has rolled back its scope. The initiative, which was due to expire in October 2020, has been continued until January 2021 and has supported half of all Saudis working in an organisation still affected by coronavirus, sectors including travel, sports and entertainment. The program originally covered 70 percent of Saudi employees in firms with over five workers, and applied to a wider swath of activities across the private sector.

 China is the largest buyer of Saudi Arabian oil. Almost 30% of the kingdom’s crude exports went to the Asian country last quarter. Japan, South Korea and India were the next biggest importers. As well as China, Aramco is keen to make further inroads into India, the fastest growing market for oil consumption before the pandemic hit. But the company faces strong competition from other suppliers and Indian refiners are among the most price-sensitive in the world. The crown prince is increasingly leaning on Aramco, the world’s biggest oil company, to help finance his plan to transform and diversify the Saudi economy — an initiative dubbed Vision 2030. That effort has faced hurdles in recent years, with investors spooked by the kingdom’s domestic political crackdown and the case of Saudi critic Jamal Khashoggi in 2018, and then with the Covid-19 pandemic last year. Aramco’s 2019 initial public offering — in which it sold about 2% of its stock on the Riyadh bourse — raised almost $30 billion. The money was transferred to the kingdom’s sovereign wealth fund and was meant to support investments to shift the biggest Arab economy away from a reliance on oil sales. Since then, Aramco has also taken on debt and started selling off some non-core assets to maintain a $75 billion dividend, most of which goes to the state. Although the Aramco IPO was the biggest share sale in history the majority of the cash was raised from local investors and rich Saudi families. Most foreign investors balked at the valuation and stayed away. The sale only earned a fraction of the $100 billion originally envisaged. Prince Mohammed said the government, which still controls more than 98% of Aramco’s stock, may sell more shares on the Saudi stock exchange, without giving a timeframe. The state-run company said in a statement that any decision to sell more shares is « a matter for the majority shareholder, who has said it will consider the possibility and timing according to market conditions. »  The kingdom is increasingly looking at ways to get money from Aramco’s assets. ON April 2021, the company announced that a U.S.-led consortium will invest $12.4 billion in its oil pipelines. It is also considering a deal for gas pipelines. Aramco has separately started a strategic review of its upstream oil and gas assets that could see the firm opening them up to foreign investors. Saudi Arabia will likely need to increase crude production further to make up for demand that’s expected to keep rising over the next two decades, according to the crown prince. While consumers such as those in China and India use more, output from producers like the U.S. and Russia is set to drop over the next 10-20 years, leaving a supply gap for Saudi Arabia to fill, Prince Mohammed said. Even if more pessimistic forecasts predicting that demand will start falling by around 2030 come true, supply will drop even more rapidly, giving Saudi Arabia the opportunity to sell more crude, he said. Prince Mohammed didn’t say by how much the country planned to raise output. The government said last year it had instructed Aramco to increase its maximum production capacity to 13 million barrels a day, up from 12 million barrels currently. That plan is « progressing very well, » Chief Executive Officer Amin Naser said in March, without giving further details on timing. Saudi Arabia regularly pumps about 10 million barrels a day and has slowed production this year amid cuts by the OPEC+ group. Last year, the kingdom’s economy shrunk the most in more than three decades, according to estimates from the International Monetary Fund. But the outlook has since improved. The budget shortfall is projected to be 4% of gross domestic product in 2021, narrower than last year’s 12% gap. Speaking on the fifth anniversary of the launch of Vision 2030, Prince Mohammed said the nation’s jobless rate will fall as the economy goes through a “V-shaped” recovery. In this interview, Prince Mohammed also touched on the delicate ties with the U.S., where President Joe Biden’s administration has said it wants to re-calibrate a relationship that was a centerpiece of former President Donald Trump’s Middle East strategy. « There will never be 100% agreement between two countries, » Prince Mohammed said. « Between different White House administrations, the margin of differences could increase or decrease but we agree with the Biden administration » about 90% of the time, he added. Asked about the kingdom’s regional rival, Iran, the crown prince softened his tone from previous statements, saying that Saudi Arabia was working to solve its differences with the Islamic Republic. « In the end, Iran is a neighboring country, » he said, adding that the kingdom wanted Iran to prosper but took issue with its nuclear program and support for regional militias. « We’re working today with our partners in the region to find solutions to these issues and we hope to overcome them and have a good and positive relationship with them, » he said. In conclusion, the dependence of Saudi Arabia is important, but the country under the governance of Crown Prince Mohammed bin Salman has all the necessary capacities and human means to face the challenges of the future and to lead the country on the path of prosperity.