Commodities, Frontier Markets

Saudi Arabia: Debt Default Looms As IMF Sees Years Of Austerity Ahead

Saudi OilThe International Monetary Fund (IMF) estimates that years of higher taxes and low fuel subsidies lie ahead for oil-rich Saudi Arabia as crude oil prices have plunged over 70 percent in 18 months and that weaker players could soon start to default on debts.

Saudi Arabia must stop relying so heavily on oil revenues, which make up over 80 percent of the government’s wealth, said Masood Ahmed, head of the Middle East department at the IMF.

“This will have to be part of a multi-year adjustment process. There will have to be a major transformation of the Saudi economy. It is necessary, and it is going to be difficult, but it is a challenge which I think the authorities have clearly laid out,” Ahmed told the UK Telegraph.

Saudi Arabia may be running a $140 billion budget deficit, according to IMF estimates, far higher than the official IMF figures of $98 billion.

In order to overcome this challenge, Riyadh needs to change its electricity, water, and oil subsidies for a population of 30 million, the IMF said.

“Energy price reform is key. It has been part of the social contract but that will now need to change,” Ahmed said.

The current oil market crisis has analysts reminded of the oil glut in 1986, when the Saudis sparked a four-month, 67 percent collapse which left oil just above $10 per barrel.

During the 1986 oil crisis, 17 of the 25 major global oil producers defaulted on their debts, Oxford Economics said. The debt in these producers rose to 40 percent of GDP on average.

“The 1980s precedents are alarming; producers that avoided sovereign defaults were the exception rather than the rule,” Oxford’s Gabriel Sterne told the Telegraph.

However, the situation today could perhaps be much more difficult for Saudi Arabia, which has now seen its population triple since that of the 1980’s.

With that of a bigger population equates to more subsidies and a larger budget deficit in the years ahead.

Saudi Arabia’s fate, on a smaller scale, could mirror the likes of Azerbaijan, whom is also heavily dependent of oil production, and is already facing a debt default as low oil prices have taken their toll.

Azerbaijan is desperately seeking a $4 billion loan from the International Monetary Fund (IMF) to keep its economy from a further plunge.



  1. Pingback: Time To Buy EM? BlackRock, Templeton, Goldman, And PIMCO Say Yes | EMerging Equity - February 26, 2016

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