SAUDI ARABIA: SPENDING THE REVENUE WINDFALL (C NF)

Created: 12/14/1990

OCR scan of the original document, errors are possible

Saudi Arabia: Spending the Revenue Windfall

Arabia will gain little economic benefit from higher domestic oil production and world oil prices, at leasi as Ions as the Kuwait crisis continues. Since August, crisis-related demands have consumed most of lhe Saudis'illion windfall in oi) revenue, and wc expect Riyadh io continue spending most of its profit to maintain the coalition defending ii. Even after the crisis is resolved, however, we believe Saudi Arabia willight fiscal picture because crisis-related demands on its resources arc likely to persist and oil revenues may decline.esult, Riyadh probably will be unwilling to make many new long-term financial commitments, be less accommodating to foreign aid requests, and will seek to maintain high levels of oil production. I

Riyadh Scrambles To Meet Financial Demand'.

The crisis has placed immediate and massive demands on Saudi Arabia's treasury. Senior officials in tbe ministries of finance and foreign affairs said that Riyadh has made commitmen sincethc start of the crisis, I

c estimateHill PUKE bp to

in supplemental, crisis*related expendi-lures throughncluding:

6 billion to support the nonwesternforces and to mobilize its own domestic force mobilization.

Nearlyillion in cash and oil aid to several countries that have provided military or political support to Saudi Arabia, including cash grants to Egypt. Syria, and Morocco and oil assistance to Tutkey.

Roughlyillion to provide fuel, local iranspoita-lion. waicr, and housing to US troops.

0 million in aid to Kuwaiti refugees.

Billion VS I

Saudi Arabia: Budget and Current

*

IM

i

7

0

6

-

Accooel

1

3

1

<

balance

i

net

Covms the pcitod6 for budget only.Eiitauied.

Paying for many of these obligations is worsening cash-Row problems for the Saudi Arabian Monetary Agency. For example, the S2 billion in oil revenues in August were inadequate to meet Saudi foreigncommitments, distribute aid to Kuwaitiand pay for Saudi troop mobilization. To finance this shortfall, Riyadh tapped local and foreignSaudi foreign exchange reserves fell by2 billion in August, according to International Monetary Fund data. The receipt of windfall oil revenues, which lags behind the lifting date bytwo months, wilWIiminaic the cash-flow problem by earlyl

Nonetheless, crisis-related expenditures will claim most of the higher oil revenue Riyadh will receiveccording tu our estimates. We project Saudi

Arabia willjpercent ofromhonfal

ion budget deficitpercent increase

I'incb Will Cooiinoe

We believe Saudi Arabia will face an uncertain and light fiscal situation, it least until ibc crisis is re* solved. Riyadh probably will be unable lo anticipate fully the outlays needed for the foreign troopdomestic mobilization, new weapons packages, and local services. In addition, the Saudis may have to make new foreign aid disbursemems to maintain or expand the coalition. At the same time, the Saudis cannot count on continued high windfall oil revenues Oil prices could continue to drop if the threat of war recedes because other producers have replacedand Iraqi production. Every dollar decline in oil prices0 million per month drop in income for the Saudi

Because of this fiscal uncertainty, we believe Riyadh will conserve ils financial resources whenever possible and operateay as you go basis We believe Riyadh probably will use ihe surpluses to increase its liquidity and enable it to meet unanticipatedand avoid future cash-flow problems. InSaudi Arabia is also likely to expand its liquid holdingsund for the reconstruction of any vital economicandfacilities and water desatimzntkvlhat could be damaged during hostilities. Because repairs to damaged oil production and export facilities would squeeze revenues, Riyadh hopes lhat byits reserves it may be able to avoid having to liquidate the long term, high yield foreign bonds it holds in its portfolio. |

An Uncertain Future

Saudi Arabia probably will continue toight fiscal picture after ihe crisis is resolved. Although Riyadh's revenues will depend on future work! oil prices and output decisions, wc estimate thairevenues could rangeillionillioni

rrrl

Meanwhile, we believe Saudi Arabia will have lo maintain many of the higher expenditures, althoug their size will depend oa the outcome o! theiyadh may face the need to keep and finance son foreign military presence and to use checkbook dip macy lo sustain ihc coaliiion. At the same time. Sa programs to expand iu military capabilities will pi additional burdens on the Saudi budget. Some San officials arc proposing doubling the .ize of ihe arm forces, for example. According to our estimates, th

Saudi Governmeni faces expendituresillionssuming no significant outlays arc needed to repair damaged economic infrastructure.

Wc believe Riyadh will face major financial risksalancing its large obligations against the uncertain incornc. In light of the uncertainty over its future budget requirements, the Saudis probably will be unwilling to make many new long-termcommitments, such as multiyear aid packages or reconstruction funds. In addition, wc believe Saudi Arabia will be largely unaccommodating to foreign requests for aid, unless Riyadh considers theseas critical to its national interest and thai they place little additional strain on the kingdom'sresources. Meanwhile, we believe Saudi Arabia will likely seek to keep oil production as high ascutting output to allow for the future resumption of Iraqi and Kuwaiti production -because of the kingdom's revenue needs and recentlyndtng to expand iu oil production capacity.

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