Payment delays out of Saudi Arabia have increased substantially, doubling and tripling in some instances, especially in the IT, electronics, petrochemical and construction sectors, and conditions are likely to get worse before a material improvement can be reasonably hoped for. The principal cause is the sharp reduction in oil earnings the Kingdom has had to accept, and while, after a number of failures, a tentative deal has been reached in Algiers by OPEC members on a (still undefined) cap on production, it is not likely to produce any sharp and lasting rise in global prices for petroleum.
Essentially, Saudi Arabia has lost the war of attrition it sought to fight against US shale oil by flooding the world markets with its own output. Many of the US producers of the black gold have been able to cut costs to where their fields are viable at USD 55-60 per barrel, which is close to half what Saudi Arabia would need to finance its welfare state and its military activities in Yemen, Syria and Iraq. With Iran now coming out from under its sanctions and Iraq cranking up liftings, it remains to be seen how long the OPEC agreement will hold and what it will achieve in practice. Meanwhile, Aramco has had to cut prices for customers in the Asia-Pacific region to defend its market share, and Saudi Arabia has had to cede to Russia its position as the largest supplier to China.
The biggest casualties have been the Kingdom’s financial reserves and its economy. Its net foreign reserves plummeted by USD 175 billion or about one-fourth in less than a year-and-a-half even though Riyadh was borrowing abroad to slow the fall. Standard & Poor’s and Moody’s both felt compelled this year to lower Saudi Arabia’s debt rating. At home, the authorities have been running a fiscal deficit of close to 13% of GDP. This has forced the government to cut fuel, electricity and water subsidies and a number of other benefits, raising the cost of living in the Kingdom and hurting the middle class. Most public servants have had allowances and bonuses cancelled or at least reduced. Public-sector salaries for Saudis as well as expats have been slashed by 20%, which has had a broad impact as nearly two in three Saudis work for the state.
Many construction projects have stalled or have been drastically cut back and thousands of construction workers have had to be laid off. Many are immigrants from poor countries and are now stranded because they cannot afford a ticket home. The government has just released about USD 1 billion owed to the Binladin Group (working on expanding the Holy Mosque in Mecca, among other things) so that it can honor unpaid wages. Other companies are on the verge of bankruptcy and unable to pay laid-off workers as well as those still on the payroll. In an effort to soften the blow the Central Bank has ordered lenders to restructure loans that Saudis can no longer afford and the government is working on a mechanism to provide cash to low- and middle-income people who rely on subsidies.
In the longer run, all this may help push the economic transformation known as “Vision 2030,” which aims to slash wasteful government spending, develop the non-oil economy and wean the population off its dependency on cradle-to-grave benefits. But for now the changes are painful and will have to be managed very carefully, lest they add fuel to the Shi’ite unrest the House of Sa’ud already faces as a potentially dangerous challenge. It should not be forgotten that the Kingdom kept itself relatively untouched by the tremors that shook other countries in the region during the Arab Spring mainly by stepping up handouts from the public till. And since then pro-Iranian Shi’ite militias such as Lebanon’s Hezbollah and Iraq’s Badr and Asaib Ahl al-Haq, with their well-trained and well-equipped forces, have been openly talking about ousting the Saudi regime and freeing Islam’s holy places from its control.
It is against this backdrop that the US Senate voted overwhelmingly to overturn a presidential veto on a bill that would allow the families of 9/11 victims to sue Saudi Arabia. The bill, based on the knowledge that most of the hijackers were Saudi nationals and on the suspicion that Saudi government officials gave assistance to them, allows the courts to waive claims to foreign sovereign immunity in cases involving terrorist acts on US soil. The Senate vote, predictably, was followed by White House warnings that it would expose the US to the risk of similar legal action in other countries, suggestions that it would put American soldiers at risk, and even Saudi threats of economic retaliation.
A report in the New York Times quotes the Saudis as having said they might sell off “up to USD 750 billion in Treasury securities and other assets in the United States” if the bill passes. This, so one heard, would crater the bond market here and trigger all sorts of other upheavals. But the threat, if it was indeed made, does not carry much weight. For one thing, the last time I checked, Saudi holdings of US debt stood at just USD 116.8 billion as of last Spring. Sales on this scale could easily be absorbed by the market. And if they did temporarily depress prices, the main losers would be the Saudis in their own portfolio. Many of the other assets the Saudis have here are illiquid, such as real estate, and could not be sold off quickly.
Saudi investors have expressed concern that their US assets could eventually become targets of legal action. At the very least they could be frozen by a US court for the long time it takes for lawsuits for damages to wend their way through the judicial system. But the investors already once repatriated billions of dollars, in the immediate aftermath of the 9/11 attacks, amid similar fears. US markets were not roiled for long then, and they will not be now, whatever defensive action the Saudis intend to take. Meanwhile, it looks as though the already quite limited scope of the bill will be narrowed further.