Saudi Arabia has opened sales of sovereign bonds for the first time in eight years in order to maintain its public spending levels as a result of low oil prices. In the past year the government borrowed $4 billion, and will seek to combine this with spending some of its foreign reserves in order to meet its obligations. Current deficit forecasts for the year are $130 billion. The current oil price of $58 is close to half of what Saudi Arabia needs in order to maintain its current spending levels ($105 per barrel). Trouble in Chinese markets and weak signals from the US show no signs of prices meeting that level in the near term.
Analysts were surprised that Saudi Arabia resorted to borrowing to meet the shortfall. In the late 1990s the government debt level hovered around 100% of GDP. This fell to 1.6% of GDP in 2014 due to years of high oil prices. The oil price decline may also be more significant than initially thought. GDP growth forecasts have fallen from 3.5% last year to 2.8% for 2015. Saudi citizens are accustomed to government largesse and this year is no exception. Extra public spending is in fact a normal occurrence, and king Salman did not change this trend despite budget shortfalls. Salman has made two months bonus salary pay to all state employees as well as pension to retired government employees. This was in addition to payments to students, professional organizations, and public works projects.
These actions are in contrast to IMF recommendations to cut public sector spending. At current deficit levels, the country will run out of its reserves by 2018 or 2019. With an economy that is over 90% dependent on oil revenues, structural reforms will have to be made or risk returning to debt levels not seen since the 1990s.
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