Saudi Arabia has about $650 billion in foreign reserves to help it withstand the slump in oil prices. But at the country’s current rate of spending, it won’t take long before the supply of reserves runs out.
According to a recent IMF report, the drop in oil prices from around $100 per barrel in 2014 to $45 per barrel this summer has already cost oil exporters in the Middle East roughly $360 billion this year. Without drastic action, several countries are at risk of using up their cash reserves within five years. From the IMF’s World Economic and Financial Survey, published on Oct. 15:
“Apart from Kuwait, Qatar, and the United Arab Emirates, under current policies, countries would run out of buffers in less than five years because of large fiscal deficits.”
Saudi Arabia, the region’s largest oil exporter, is particularly vulnerable as 90% of its export earnings come from the petroleum sector. The country relies on its reserves to help finance its public spending and has spent more than $70 billion of these reserves since oil prices began falling last year.
The decline in oil prices already has led Saudi Arabia to run up a deficit as a result of maintaining high public spending. The IMF reports that the country is expected to have a budget deficit of 21.6% of GDP this year, moderating to 19.4% in 2016. This compares with a deficit representing 3.4% of GDP last year.
The IMF warns:
Because the oil price drop is likely to be large and persistent, oil exporters will need to adjust their spending and revenue policies to secure fiscal sustainability, attain intergenerational equity, and gradually rebuild space for policy maneuvering. … Adjustment plans in most [Middle East and North African] oil exporters are currently insufficient to address the large fiscal challenge.