By David Fickling
Riyadh needs to start cutting its coat according to its cloth, and fast
There’s a certain devil-may-care glamour about going on a shopping spree when you’re already living beyond your means. It’s probably not the best way to convince your creditors to keep putting up the cash, however.
Saudi Arabia might want to reflect on that after its recent splurge on oil companies, cruise ships and soccer. In the past month, the kingdom’s sovereign wealth fund has bought or been linked to plans to buy an 8.2 percent stake in cruise operator Carnival Corp.; about 80 percent of Newcastle United Football Club; and holdings in Royal Dutch Shell Plc, Total SA, Eni SpA and Equinor ASA.
Alarmingly, the most sensible item on that shopping list may well be the 13th-placed team in the English Premier League. Carnival shares, for instance, are already down by about a third since the kingdom’s Public Investment Fund (PIF) completed its acquisition of stock in the business last month.
A country as over-exposed to crude as Saudi Arabia shouldn’t be using its sovereign wealth fund to buy more oil, either. Equinor’s controlling shareholder, the state of Norway, last year instructed its pension fund to sell off investments in upstream oil and gas, so as to “make the government’s wealth less vulnerable to a permanent drop in oil prices”. Saudi Arabia is doing the opposite.
Even the PIF’s more prudent attempts to diversify its exposures into businesses distant from oil demand haven’t panned out so well. A pre-listing investment of $3.5 billion in Uber Technologies Inc. is worth less than $2bn now. Its 38 percent stake in South Korea’s Posco Engineering & Construction Co. has lost more than two-thirds of its value since it was bought in 2015. And the kingdom managed to sell out of Tesla Inc. before its extraordinary rally at the start of the year.
As rich heirs have known since time immemorial, a string of failed business ventures doesn’t need to cramp your style as long as that endowment cash keeps flowing — but the problem for Saudi Arabia is that, as we’ve argued, those days are fast running out.
As recently as 2014, years of outsize profits on crude had left the government sitting on net assets equivalent to 47 percent of gross domestic product. Since then, lower prices and incontinent spending have eroded Saudi Arabia’s nest egg with astonishing speed.
Net debt will hit 19 percent of GDP this year, according to the International Monetary Fund, before rising to 27 percent next year, while coronavirus and oil-fight measures could push gross borrowing to 50 percent by 2022.
That’s still modest by rich-country standards, but none is as leveraged as Saudi Arabia is to the price of a single commodity.
Barring extraordinary cuts to its budget or a 2008-style oil price spike, the kingdom is likely to remain a net debtor for the foreseeable future.
Lenders already appear to be taking notice. Thanks to the general virus-inspired market panic and the specific effects of the current oil-price war, five-year credit default swaps insuring against non-payment of Saudi Arabia’s debt are currently running at about 179 basis points. That puts the country in the company of India, Indonesia, and Russia in terms of perceived credit risks, and far worse than the likes of Spain, Portugal, Ireland and Iceland.
Its sovereign bonds still have a weighted average coupon of 3.43 percent and maturity in the latter half of 2030, so for the moment things seem comfortable enough. But lower-for-longer oil prices could cause that outlook to unwind remarkably quickly, especially if the kingdom’s fast-shrinking foreign reserves start putting pressure on the riyal’s dollar peg.
Despite the PIF’s shopping spree, there are signs that Riyadh is aware of how constrained its circumstances are starting to become. Last week's announcement of a ceasefire in the bloody five-year war in Yemen is welcome for humanitarian reasons — but it’s also necessary on a more pragmatic level. Saudi Arabia’s military spending is the third-biggest globally after the US and China, and amounts to an extraordinary 8.8 percent of GDP — the highest share of any for which the World Bank has recent data.
The ceasefire is being attributed to the impact of Covid-19, but it’s hard not to notice that military spending this year will fall to its lowest level in a decade. When the finances get tight, you just don’t have the money to spend on a quagmire that you once did.
That willingness to make cuts is welcome — but once you add the amounts dedicated to domestic security, some 28 percent of Saudi Arabia’s budget is still going on such expenditures. It’s not surprising that a government lacking popular legitimacy in the middle of a strife-torn region should be spending a lot of money on self-preservation. Still, a country where 40 percent of the 33 million-strong population is under 25 might want to invest more on health, education and other longer-term goals.
It’s probably that 1 trillion riyal ($271bn) government budget, rather than splashy overseas acquisitions, where the biggest savings need to be made right now. The message is the same, though: Riyadh needs to start cutting its coat according to its cloth, and fast.