Saudi Arabia Unveils $32 Billion Stimulus

Daniel Davis

Saudi Arabia has introduced a stimulus plan to counter worsening economic conditions. On Friday, it announced a $32 billion two-part emergency plan necessitated by low oil prices and the Covid-19 coronavirus global health crisis. 

Details of the Saudi Stimulus Package

The first part of the stimulus package includes 50 billion riyals ($13.32 billion USD) which will be disbursed from the state’s central bank. The measure is designed to keep banks and businesses afloat, according to Reuters. Saudi Finance Minister Mohammed al-Jadaan also unveiled an additional 70-billion riyal stimulus component for businesses that will help them defer the payment of government fees and taxes.

Additionally, Saudi King Salman authorized his ministers to raise the debt ceiling to 50% of the state’s GDP, an increase from 30%. Riyadh will use the breathing room to borrow money to help offset a growing deficit. Originally, it was forecast to grow 6.4%, but recent events have caused Jadaan to revise his estimate to 7 to 9%.

“We have huge reserves and very large investments, but we don’t want to liquidate any of these so we will borrow,” said Jadaan. Even with the authorization to borrow more, he expects to borrow a maximum of 100 billion riyals in 2020 and reach the 50% debt ceiling in 2022.

Disastrous Plunge in Oil Prices

Oil prices have fallen 60% since the beginning of the year and despite introducing a tourist visa last year, Riyadh has not yet established another major source of income for its oil-dependent economy. Crown Prince Mohammad bin Salman (MbS) created the Saudi Vision 2030 plan four years ago in an effort to reshape the kingdom’s economy. Notably, it calls for an increase of non-oil trade, and the development of an entertainment industry. 

However, all those plans have been called into question due to global scale of the coronavirus and the oil price war with Russia. Although Vision 2030 will most certainly carry on as planned, the kingdom’s focus now is on stopping the free-fall of its economy before it is forced to dip into reserve funds.

Riyadh’s Additional Emergency Resources

The $32 billion stimulus is only one of the tools available to Riyadh, according to Jadaan. It could cut spending or, in the worst case, take from its reserve fund. In December, he announced that the reserves totaled 500 billion riyals ($133 billion), but the Sovereign Wealth Fund Institute estimated it could be as high as $320 billion and CEIC Data pegged its sum at $490 billion in January. 

Riyadh also introduced an emergency budget to cover any future costs that may arise due to Covid-19. 

“Some budget appropriations will be reviewed and reallocated to the sectors most in need in the current situation, including allocating additional funds to the health sector as needed,” Jadaan said.

Saudi Arabia currently heads the G20 forum and as such, requested an emergency meeting of its members next week. Together, it hopes the G20 can find a solution to the economic problems that continue to plague global markets. Riyadh is not alone in introducing economic stimulus measures. Germany is devoting €550 billion, the UK £330 billion, and Italy £340 billion, Arab News reported.

American-Saudi Cooperation

The US is also likely to pass a $1 trillion relief package on top of a previous $100 billion measure. Washington and Riyadh have other business together beside the pending G20 meeting, which will take place virtually to avoid transmission of Covid-19: oil. The US is dispatching a delegate to Riyadh, officials announced Friday, to negate an end to the oil price war.

Although Russia set off the dispute by refusing OPEC demands to reduce production, Saudi could be easier to negotiate with as it is considered a strong US ally. Trump administration officials praised the kingdom for keeping the global oil market stable for the past few decades and expressed optimism that they can restore it once more. 

One possible solution is for production cuts on the US side, said Ryan Sitton, a member of the Texas Railroad Commission, a regulatory body overseeing the state’s energy industry. Texas has not cut production since the 1970s, a fact that underscores the severity of the measure. Due to the federalist nature of the US government, Washington does not set limits, instead leaving that up to individual states. While Texas may see some sense in cutting a deal with OPEC to reduce production, other industry executives aren’t convinced that is the right choice. 

“Our view is simple. Quotas are bad,” said Frank Macchiarola, senior vice president of policy, economics and regulatory affairs at the American Petroleum Institute. “They’ve been proven ineffective and harmful. There’s no reason during this time to try to imitate OPEC.”

Saudi Arabia needs a price of $82 per barrel to keep its budget steady, the International Monetary Fund said. Brent crude was $28.28 on Friday. Until the oil price begins to swing upward once again, Riyadh faces a financial predicament it is unaccustomed to experiencing. While it can unleash stimulus spending to cover some of the coronavirus effects, the solution is not a long-term strategy. For its economy to rebound Riyadh needs oil to recover — Covid-19 or not.