The Covid Effect: Saudi Arabia checks its vision

Author Samira Kawar

The pandemic has dealt Riyadh a triple blow just as Saudi Arabia's de facto leader was trying to steer the country in a new and different direction, writes Samira Kawar.

This series of country profiles from Petroleum Argus provides a snapshot of how key oil and gas producers and consumers are being changed by the Covid-19 crisis.

Saudi Arabia is carefully tiptoeing out of Covid-19 mode, although travel restrictions to and from the country will not be fully lifted till the start of 2021. As of 21 September, it had recorded nearly 331,000 cases and 4,542 deaths, but recent new cases rates of around 570 per day are running well below the mid-June peak of nearly 5,000.

The pandemic has dealt Riyadh a triple blow, creating a public health emergency, severely damaging the economy and also creating a crisis in oil markets that Saudi Arabia, as the de facto leader of Opec, has had to manage. But after a shaky start, the kingdom has risen to the challenge, working with Russia and other producers in the broader Opec+ alliance to coordinate an effective response to the pandemic-induced collapse in global oil demand. The huge output cuts implemented by these producers succeeded in lifting oil prices back above $40/bl, and Saudi Arabia has led by example, cutting beyond its own output pledges. But it has also demanded discipline and robust compliance, employing a forceful brand of diplomacy to ensure that non-compliers agreed to make compensatory output reductions if they exceeded pledged production limits.

The pandemic has delivered a major setback to the Saudi economy just as its de facto leader, Crown Prince Mohammad bin Salman, commonly dubbed MBS, was trying to steer the country in a new and different direction through his ambitious Vision 2030 economic reform programme.

Saudi Arabia's 2020 budget is based on an apparent average Brent price of $65/bl, and forecasts oil revenues of 513bn riyals ($137bn), accounting for just over 61pc of overall government income. But front-month Brent has averaged only around $42/bl so far this year, and Saudi oil revenues sank by 35pc on the year to $59.9bn in January-June, driving up the budget deficit in that period to SR143.4bn, from SR5.684bn a year earlier. The IMF expects Saudi Arabia's economy to shrink by 6.8pc this year, and estimates the country needs an $80/bl oil price to balance its budget.

When MBS launched Vision 2030 in 2016, he rashly predicted that the Saudi economy's overwhelming dependence on oil revenues would be over by 2020. But the kingdom still heavily depends on oil, and is battling to support its ailing economy, starting with a $48bn stimulus package announced in May. The wider pandemic-related economic crisis further strained the budget, and finance minister Mohammed al-Jadaan said "painful" measures would follow. These have included a tripling of VAT to 15pc and salary cuts for government employees, although imposing income tax has been ruled out for the foreseeable future.

Other Vision 2030 elements also seem out of reach. The goal of boosting non-oil government revenue to SR1 trillion by 2030 from SR163bn in 2016 seems unrealistic. More spectacular and expensive elements of Vision 2030, such as Neom, the futuristic $550bn city to be built on the Red Sea coast, could be scaled down.

But one of Vision 2030’s main pillars – privatisation – is going ahead. The spin-off of government assets, building on last year's initial public offering of state-controlled Saudi Aramco, will proceed, with the aim of raising over SR50bn in the next 4-5 years from privatisations in healthcare, water and education.

Aramco itself is reacting to lower oil sales and revenues by cutting capital expenditure to around $25bn this year, from a previously planned $35bn-40bn. Next year's previously planned $40bn-45bn capital spending will also be significantly cut. Capacity expansions at the offshore Berri, Marjan and Zuluf oil fields are being slowed down, and the $110bn Jafura shale gas development is likely to be delayed.

Aramco chief executive Amin Nasser insists that Aramco will emerge from the pandemic "stronger than ever before". While some western majors like BP are starting to shift to a lower-carbon business model, Aramco's low production costs and access to further low-cost resources will allow it to compete effectively for market share even as oil demand begins the long, slow decline that some argue has been accelerated by Covid-19.

But what of Saudi Arabia more generally? Before the pandemic, the kingdom’s reputation as a source of stability had taken a hit, courtesy of MBS' growing but unpredictable influence. Tensions with neighbours such as Iran and Qatar have risen, while the country's continuing five-year military campaign against Iran-aligned Houthi rebels in Yemen will keep military spending in this year’s budget at SR182bn.

Internally, however, MBS has managed to ensure his eventual succession of his 85-year-old father, King Salman bin Abdul-Aziz. He has taken control of the levers of power, side-lining other influential members of the ruling Al Saud family who might have objected to his accession. A close personal alliance with US president Donald Trump has shielded him from the consequences of some more reckless Saudi actions, most obviously the 2018 murder in Istanbul of US-based Saudi journalist — and MBS critic — Jamal Khashoggi. With a US presidential election that could put a new occupant in the White House now less than six weeks away, that creates a third element of uncertainty for Saudi Arabia, beyond the path of Covid and the path of oil markets, as it looks to the future.

Previously in this series

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