The attack on Saudi Arabia’s oil production could rip through an economy whose vulnerabilities were already laid bare by output curbs negotiated by Opec.
Growth in the kingdom, where the oil and gas sector accounts for about 50% of gross domestic product, was on track to slow to 1.9% this year even as the non-oil economy showed signs of revival, according to the International Monetary Fund. Public finances were enough of a worry that the IMF was calling for a tighter fiscal policy to safeguard the country’s budget.
The Saudi economy “has been in a prolonged state of stagnation since 2014,” when it succumbed to a crash in oil prices, said Marcus Chenevix, an analyst at investment research firm TS Lombard in London. “To have this come just at the moment when some green shoots are starting to emerge must be profoundly frustrating.”
If the halt caused by the weekend strikes on the Abqaiq crude processing plant – which handles 5.7mn barrels of oil a day, or about half of Saudi production – lasts until the end of 2019, it would slash GDP in the fourth quarter by more than 20% from a year earlier, according to Capital Economics.
Aramco’s chief executive officer Amin Nasser said daily production should return to pre-attack levels of about 4.9mn barrels by the end of September. A full recovery is expected in 10 days, according to Crown Prince Mohammed bin Salman.
The worst-ever sudden disruption to global oil supplies could still be a test even for Saudi Arabia’s economic defences. But low public debt and net foreign assets in excess of $500bn offer significant ammunition. The stockpile of reserves “gives the monetary authority the ability to intervene in the markets at any time,” the central bank’s governor, Ahmed Abdulkarim Alkholifey, said on Tuesday.
Judging by interbank borrowing costs, the financial industry is showing little sign of distress. Banks’ loan-to-deposit ratio, a measure of liquidity, was at 79% in June as calculated by the Saudi regulator, almost 11 percentage points below the mandatory threshold.
Given subdued lending growth, liquidity within the banking industry is “comfortable,” according to Edmond Christou, a Dubai-based banking analyst with Bloomberg Intelligence.
Momentum has been elusive for the economy as it healed after a contraction in 2017. Despite signs of a pick-up, a measure tracking business conditions in its non-oil private sector dropped in July for the first time in 2019.
Non-oil activity remains heavily dependent on government outlays financed by energy income.
It’s the revenue side of the government’s ledger that stands to take the biggest hit if the worst fears come true. Even before the weekend attacks, Morgan Stanley was expecting a “deterioration” in the budget performance during the second half of the year, raising its forecast of the deficit to 6.9% of GDP, compared with Saudi Arabia’s target of 4.2%.
For Standard Chartered Plc, “a prolonged outage” would present a threat to its deficit forecast of 7.5%, according to Bilal Khan, the bank’s senior economist for the Middle East, North Africa and Pakistan in Dubai.
“The recent uptick in non-oil activity has been supported by higher government spending,” he said. “If this is to be sustained, a wider-than-expected fiscal deficit would likely be financed through a mix of additional borrowing and deposit draw-downs.”
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