As crazy as it sounds, the Saudis are going broke.
Of course you wouldn’t know it if you read the account of King Salman’s latest visit to Washington which included booking the entire DC Four Seasons and procuring a veritable fleet of Mercedes S-Class sedans.
You’d also be inclined to think that everything is fine if you simply looked at SAMA holdings (i.e. FX reserves) which still total nearly $700 billion.
The problem however, is the outlook.
Fighting wars costs money and so does bribing the citizenry to ensure you don’t get some kind of Arab Spring-type uprising. When you endeavor to artificially suppress the price of the export that is the source for your wealth and international prestige (all in an epic attempt to bankrupt the competition and secure geopolitical “ancillary benefits”) you don’t do yourself any favors from a financial perspective and now, the Saudis are staring down a massive budget deficit and a current account that’s in the red for the first time in ages.
So while things may look on the up and up from an FX reserve perspective (even as the cushion is at its lowest level since 2013) and while the kingdom has plenty of capacity to borrow with a debt-to-GDP ratio of just a little over 2%, things are about to get ugly very quickly going forward and if Riyadh decides to plunge headlong into Syria’s civil war, it will only get worse. Note that while debt levels are likely to stay low relative to a world where countries like Japan are borrowing so much that the number of decimal places won’t even fit into a title, going from basically 0% to ~16% of GDP in the space of just 24 months isn’t exactly a good sign:
The situation is in fact so dire that the Saudis have begun delaying payments to contractors in an effort to preserve cash.
On Wednesday, the IMF is out with a new report on the economic outlook for the Mid-East and the picture for the Saudis is not pretty. In short, Riyadh will burn through its cushion in less than 5 years under current conditions. Here’s more:
