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Petrostate Cash Crunch Continues Amid Oil Collapse, Proxy Wars

On Friday we noted that Qatar has now followed Saudi Arabia into the debt markets to raise cash amid slumping crude prices. Specifically, Qatar issued some $4 billion in bonds earlier this month - the offering was oversubscribed four times. Central bank Governor Abdullah Bin Saoud Al Thani said simply, “Interest rates are low in Qatar now so we decided it was the right time to issue these bonds and sukuk.” 

Indeed, but it’s clearly not all about interest rates although, as we said last month regarding the Saudis’ return to the bond market, there’s something hilariously ironic about the fact that one reason crude prices have remained so low is that ZIRP has kept capital markets open to insolvent US producers allowing them to stay in business longer than they otherwise would have, effectively making the war to maintain market share longer and more painful than the Saudis had figured on, and that, in turn, has now led Gulf states to tap the very same accommodative capital markets that are keeping their US competition in business.

In short, the fallout from the demise of the petrodollar is becoming impossible to sweep under the rug even as Gulf states are keen to downplay the severity of the budget crunch.

For the Saudis, who need crude at $100 to plug a budget deficit that’s projected at a whopping 20% of GDP, the situation is becoming particularly acute and indeed, the kingdom is now set to slash any “unnecessary expenditures.”

Here’s AFP:

"We are working... to cut unnecessary expenditure," Finance Minister Ibrahim al-Assaf told Dubai-based CNBC Arabia in Washington, where he is accompanying King Salman on a visit.

 

"There are projects that were adopted several years ago and have not started yet. These can be delayed," Assaf said.

 

He said the government would issue more conventional treasury bonds and Islamic sukuk bonds to "finance the budget deficit" - which is projected by the International Monetary Fund at a record $130bn (£86bn) for this year.

 

The kingdom has so far issued bonds worth "less than 100 billion riyals (£17.8bn)" to help with the shortfall, he said, without providing an exact figure.

 

"We intend to issue more bonds and could issue sukuk for certain projects... before the end of 2015," Assaf said.

 

 

And then just hours ago, via Reuters:

Saudi Aramco, the kingdom's state oil giant, is talking to banks about raising a $5 billion loan related to a refinery it built in collaboration with China's Sinopec, three sources with knowledge of the matter said on Monday.

 

The funds raised from banks will be used to replace some of the capital Aramco invested to build the 400,000 barrel per day (bpd) refinery at Yanbu on the west coast of the kingdom, which can then be deployed in other projects.

In other words, the kingdom needs to borrow if it wants to keep financing projects at current crude prices. 

For Qatar, the situation isn't quite as dire. At $65/b, Qatar's break-even price is far lower and the budget gap, so far anyway, is negligible. But that doesn't mean the country's officials aren't acutely aware that the world is now scrutinizing the budgets of petrostates in the wake of collapsing crude and indeed on Monday, Qatari Finance Minister Ali Sherif al-Emadi was at pains to reassure the market that as of now, there's no danger of projects being cut. Once again, here's AFP:

Qatar will not scale back economic development projects or cut state subsidies for fuel and food in response to low oil and natural gas prices, because government finances remain strong, the finance minister said on Monday.

 

The comments by Ali Sherif al-Emadi set Qatar apart from other wealthy Gulf Arab oil exporting states; the other five members of the Gulf Cooperation Council have begun to curb spending or review costly consumer subsidies because of the plunge of energy prices since last year.

 

Qatar, the world's top liquefied natural gas exporter, is in the strongest financial position. A Reuters poll of economists last month found them predicting Doha would run a state budget deficit of only 0.7 percent of gross domestic product this year, the region's smallest deficit.

 

"Our budget is still not that far in terms of deficit," Emadi said at a financial conference, adding that state finances would break even with an average oil price of $65 a barrel. Brent crude is currently around $49.

 

"I still think the financial situation is very healthy and I don't think we'll take any extra measures for these things," he said when asked whether subsidy cuts were possible.

So while Qatar may be in the best position vis-a-vis its neighbors, when looked at in context, it's not entirely clear that "healthy" is the right word to use when describing the fiscal situation relative to history:

While subsidies are obviously a key consideration for the Saudi budget and also for Qatar, it's certainly worth paying attention to developments in Yemen when discussing the outlook for the two countries' fiscal accounts. As noted earlier today, Qatar deployed 1,000 troops over the weekend after a deadly rocket attack killed 45 UAE soldiers and 10 Saudi soldiers on Friday. If the push to take Sana'a ends up leaving the gulf monarchies mired in a protracted conflict, it could materially impact the region's financial health in the face of persistently low crude and dwindling petrodollar reserves. 

We're quite sure we'll be revisiting this sooner rather than later, especially given the fact that Saudi Arabia and Qatar are highly likely to get drawn deeper into the conflict in Syria as well, but for now we'll close by posing the following question to Saudi Finance Minister Ibrahim al-Assaf:

When you talk about "unnecessary expenditures", does this count? ...