Earlier today, we parsed Saudi Arabia’s budget report in order to determine if the kingdom’s fiscal nightmare was better or worse than market expectations.
As it turns out, it was better. This year’s deficit is expected to come in at around 15-16% of GDP, considerably below the 20% some analysts feared. For 2016, it looks as though the number should be somewhere in the neighborhood of 13%, broadly in line with expectations.
Be that as it may, the Saudis are boxed in as long as they insist on, i) keeping oil prices depressed, ii) maintaining the riyal peg, and iii) holding subsidies steady. If something doesn’t give with at least one of those imperatives, then the kingdom will continue to burn through its SAMA reserves which fell by $12.55 billion in November from October.
The problem is that deviating from any of the points outlined above has consequences. Allowing oil prices to rise risks putting uneconomic US production back online, dropping the riyal peg would be a significant black swan event for markets and would represent a landmark break with three decades of precedent, and easing up on the subsidies risks creating the type of social unrest that occurred elsewhere in the region during the Arab Spring.
Well it looks like when it came time to choose, the Saudis decided that the people will have to suffer because today, Saudi Arabia raised the price of domestic fuel by up to 40%.
And that’s not all.
Prices for gas, diesel, kerosene, water and electricity were also raised.
Indeed, some Saudis were looking to fill up before the price hike:
"The kingdom's finance ministry also said it was considering plans to raise charges on public services and apply value-added tax (VAT) in cooperation with other Gulf Arab nations," Mid East Eye notes, adding that "public revenues are the lowest since 2009, when oil prices dived as a result of the global financial crisis." For those who might have missed it, here’s some helpful commentary and visual from Deutsche Bank which give you some insight into the subsidies and underscore just how “generous” the monarchy had been:
The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit. However, this is a highly unlikely scenario given the demographic differential between KSA and UAE and the socio-economic impact that such an outcome (blended prices rising from USD0.11/l to USD0.5/l) could have within the country.
The Saudi government could look to increase electricity tariffs. This would be a challenge for residential consumption (51% of aggregate consumption) given the political/social impact, though it would present the highest incremental revenue benefit. Bringing up the electricity rates for industrial/commercial consumers to UAE levels could raise incremental revenues of USD3bn, which, while higher than those from the chemical sector feedstock impact, is still only 2.3% of the budget deficit.
But even as the kingdom looks set to rollback the state assistance, one thing it's not skimping on is defense spending. Here's Bloomberg:
Saudi Arabia increased its military and security spending in 2015 by about 20 billion riyals ($5.3 billion), Economy and Planning Minister Adel Fakieh told reporters on Monday.
Fakieh attributed the rise to the kingdom's participation in Operation Decisive Storm, an intervention by a Saudi-led Gulf Arab coalition in Yemen's civil war.
The government had previously not disclosed the cost of its intervention in Yemen, which largely consists of air strikes.
We highlighted Saudi defense spending on Sunday when we noted that US foreign arms sales soared 35% in 2014 thanks in no small part to orders from Riyadh.
So while Saudi citizens may have to do a bit of belt tightening in the new year, the kingdom isn't about to ease off the regional warmongering because if there's anything more critical than preserving domestic stability, it's rolling back Iranian influence in the Arabian Peninsula by pushing the Houthis out of Sana'a.
Actually, that's not true. There's something even more critical than that: persisting in the war of attrition against the US shale complex which much be crushed at all costs, even if means making life harder for everyday Saudis so the monarchy can buy itself some budget breathing room.
We shall see if there's an attendant backlash among the Saudi populace. Who knows, it might just be that Saudi citizens decide to heed Bakr al-Baghdadi's recent call for a popular revolt, because at the end of the day, what's more absurd than soaring gas prices in the country with the most oil in the world?