The Daily Update - Saudi Arabia & Oil

Brent crude continues to look to test the USD 80 per barrel level helped by the US sanctions on Iran which are due to take effect in November but are already hitting crude export volumes out of Iran. Thus, the market is starting to look to the OPEC and non-OPEC producers’ 23 September meeting in Algiers for guidance: given potential supply constraints from Iran and Venezuela and seeming pressure from the US to avoid a spike in prices ahead of the midterm elections some action or talk to maintain prices in the USD 70-80 range looks likely.

Stronger oil prices continue to benefit oil exporters, notably the GCC countries and with this government funding pressures have eased somewhat.  Indeed, Moody’s note that in 1H2018 total sukuk issuance fell 12% yoy to USD55bn ‘partly because of reduced activity by GCC sovereigns’ which saw sukuk issuance decline 32% to USD16.7bn. They note that this ‘likely reflects rising oil prices, which have reduced government's' budget deficits, and hence their borrowing requirements.’

The IMF’s Article IV report on Saudi Arabia notes ‘Oil prices have risen over the past year and are positively affecting fiscal and external balances.’ The IMF projects an improvement in the fiscal deficit from -9.3% in 2017 to a -4.6% in 2018 and -1.7% in 2019.  The current account position is also projected to increase to a surplus of 9.3% of GDP in 2018 and 8.8% in 2019 from 2.2% in 2017.

At this stage the proposed listing of Saudi Aramco, which was supposed to raise around USD100bn, looks to be delayed although Energy Minister, Khalid al-Falih has stated that the government remains committed to the IPO. So a USD 70-80 oil price would likely help government revenues.  Importantly, Saudi Arabia still retains significant asset buffers which give it room to manoeuvre and general government debt to GDP is low at 17% at the end of 2017. Moreover, greater index inclusion is whetting investors’ appetite for GCC paper.

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