A Rare Glimpse Behind Saudi Arabia's Deteriorating Finances

  • Kingdom’s Public Investment Fund will cut back on lending
  • The government has slashed spending by more than 70 percent

Prospectus Sheds Light on Saudi Economy

As Saudi Arabia prepares to meet investors Wednesday with a view to selling its first international bonds, the country has disclosed little-known information about its economy. Here are four statistics that catch the eye.

1) Oil Income Plunged About 70% in 5 Years

Saudi Arabia relies on oil for three-quarters of its income. Crude revenue has slumped 68 percent since 2011 to 334 billion riyals ($89 billion) this year amid a supply glut.

The slide in prices accelerated after OPEC adopted a Saudi-led strategy in 2014 to allow members to pump as much as they wanted to protect the group’s market share and drive higher-cost producers out of business. As oil swamped the market, prices fell to a 2003 low of about $28 a barrel in January.

The Organization of the Petroleum Exporting Countries agreed last month to cut output to support crude, which traded over $50 a barrel this month.

2) Spending Cuts

The kingdom slashed capital expenditure by more than 70 percent this year to 75.8 billion riyals. Current spending, including salaries and government services, is forecast to decline 19 percent.

The cuts mean that investments in infrastructure projects will drop to less than a tenth of government spending, from about a third in 2011. The government has delayed payments to contractors and is weighing plans to cancel more than $20 billion of projects, people familiar with the matter said last month. It has also suspended bonuses and trimmed allowances for government employees.

3) Government Debt is Rising Fast

Saudi Arabia has been selling domestic bonds for over a year to fund the largest budget shortfall among the world’s 20 biggest economies. Debt has ballooned more than six times since the end of 2014 to 273.8 billion riyals as of the end of August, according to the prospectus.

Most of the debt is domestic. In the first eight months of the year, the government raised 94 billion riyals from the sale of government bonds to local banks and institutions, and it raised 98 billion riyals last year, according to the prospectus. It has a $10 billion sovereign loan that was signed in May.

Public debt levels will increase to 30 percent of economic output by 2020 from 7.7 percent, according to targets set out in an economic transformation plan released in June.

4) PIF Will Cut Back on Lending

Since it was created in 1971, the Public Investment Fund has focused on lending to development projects in the country. Outstanding loans by the PIF, as the fund is known, rose to 104 billion riyals at the end of 2015, from 57 billion riyals at the end of 2011, according to the prospectus. In the future, the PIF “will not act as a source of lending to the same extent that it has historically,” according to the document.

Transforming the PIF from a lender on domestic projects into the world’s largest sovereign wealth fund is a key part of Saudi Arabia’s plans to diversify the economy away from oil. The government is looking to sell less than 5 percent of national oil company Saudi Aramco in an initial public offering and transfer ownership of the rest of the company to the PIF. The shift will give PIF assets of more than $2 trillion and will technically make investments the main source of government revenue, not oil, Deputy Crown Prince Mohammed bin Salman told Bloomberg in March.

There is a long way to go. The fund had assets of 587 billion riyals as of June 30, and received more than 20 billion riyals in dividends, mostly from its holdings of Saudi Arabian equities, including Saudi Basic Industries Corp. and National Commercial Bank, according to the prospectus.

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