Riyadh 'ready for oil prices to stay low'

The collapse in oil prices has slashed government revenue in Saudi Arabia, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade.
The collapse in oil prices has slashed government revenue in Saudi Arabia, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade.PHOTO: REUTERS

Fuel subsidies cut in big shake-up of economy as Saudis prepare to outlast other producers

RIYADH • Saudi Arabia's planned cuts in spending and energy subsidies signal that the world's largest crude exporter is bracing itself for a prolonged period of low oil prices.

The Opec heavyweight shows no signs of wavering in the long-term oil strategy it has orchestrated since last year. Instead, it appears willing to continue tolerating cheap crude to defend market share and wait for the market "to balance" without cutting supplies, oil sources and analysts say.

In one of the strongest signals that the kingdom will stay the course despite the impact on its finances, Saudi Aramco Oil Company chairman Khalid al-Falih said it could outlast other oil producers.

"We see the market balancing sometime in 2016, we see demand ultimately exceeding supply and soaking up a lot of the excess inventory, and prices in due course will respond regardless of when and by how much," Mr Falih told a news conference late on Monday when detailing next year's budget.

Saudi Arabia has cut fuel subsidies and allocated 213 billion riyals (S$80 billion), the biggest part of government spending in next year's budget, to defence and security.

The authorities announced increases in the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatise some state-owned entities and introduce value-added taxation as well as a levy on tobacco.

The biggest shake-up of Saudi economic policy in recent history coincides with growing regional unrest, including a war in Yemen where a Saudi-led coalition is battling pro-Iranian Shi'ite rebels. In attempting to reduce its reliance on oil, the kingdom is seeking to put an end to the population's dependence on government handouts, a move that political analysts had considered risky after the 2011 revolts that swept parts of the Middle East.

"This is the beginning of the end of the era of free money," said Mr Ghanem Nuseibeh, founder of London-based consulting firm Cornerstone Global Associates. "Saudi society will have to get used to a new way of working with the government. This is a wake-up call for both Saudi society and the government that things are changing."

This is the first budget under King Salman, who ascended to the throne in January, and for an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed Salman.

In its first months in power, the new administration brought swift change to the traditionally slow-moving kingdom, overhauling the Cabinet, merging ministries and realigning the royal succession.

The collapse in oil prices has slashed government revenue, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade. The government recorded a budget deficit of 367 billion riyals this year. For next year, the government expects the deficit to narrow to 326 billion riyals. Spending, which reached 975 billion riyals this year, is projected to drop to 840 billion riyals. Revenue is forecast to decline to 513.8 billion riyals from 608 billion riyals.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 30, 2015, with the headline 'Riyadh 'ready for oil prices to stay low''. Print Edition | Subscribe