Thursday, October 22, 2020

Saudi Arabia's economic crisis, explained in 10 graphics

The kingdom has been hit hard by the coronavirus pandemic and falling oil prices among other challenges

Middle East Eye: Saudi Arabia has been trying to diversify its economy for decades, as emphasised in Vision 2030, launched by Crown Prince Mohammad Bin Salman.

But the the dual shocks of coronavirus and tumbling energy prices have hurt its plans, particularly in the non-oil sector, which is forecast to contract by 14 percent this year. 

For your average citizen in Saudi Arabia, that means only one thing - more belt tightening. These are the key threats.

1. Saudi Arabia can no longer rely on oil

Oil revenues account for around two-thirds of the kingdom’s exports. But while Saudi Arabia was once responsible for nearly 30 percent of global oil exports, that figure has now dropped to just 12 percent, according to Capital Economics.

Riyadh started a price war in March in an apparent bid to damage rival producers, even as global demand was sinking due to Covid-19. It flooded the market, but in doing so saw its crude export revenues dropped by 65 percent compared to April 2019. “The sharp decline in oil prices, exacerbated by demand loss from the pandemic, has hit Saudi Arabia particularly hard,” said Boris Ivanov, founder and managing director of consultancy GPB Global Resources.

Prices have recovered since to about $44 a barrel – but that is still well below the $77.6 a barrel that the kingdom needs to balance its budget. Nor is there any sign that it will return to those levels.

Nor is the global outlook positive: demand is projected to fall “by 8.1 million barrels a day, the largest in history” because of Covid, according to the International Energy Agency (IEA). Looking forward, the organisation predicts that demand will peak by 2030 due to the rise in renewable energy.

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Beirut explosion: How the port blast will hit Lebanon's economy

 Disaster spells catastrophe for country's much-needed imports and will likely hit the already flagging currency, experts tell MEE

Middle East Eye: The huge explosion at Beirut’s port is a crippling blow to a country that had been reeling from a political and financial crisis, a depreciating currency and the Covid-19 pandemic. Economic damage from the blast is being estimated in the billions of dollars.

“It’s hard to imagine the financial cost of this disaster, it is in the billions. The port is completely destroyed, and much of the city is damaged. Who will pay for the reconstruction of Beirut?” said Laury Haytayan, a Beirut-based expert at the National Resource Institute.

Beirut port, which was the epicentre of the explosion, is the country’s main logistics hub and its deepest sea port. 

“It was the beating heart of the country as it provided around 80 percent of imported goods, which kept the economy moving,” said Sami Halabi, director of knowledge and co-founder of Triangle Consulting in Beirut.

The closure of the port threatens food security in the country, which is import reliant for an estimated 65-85 percent of food needs, according to a Triangle report. Some 15,000 tonnes of wheat had been stored at the port’s silos.

“The disaster will have a dramatic impact on food security. Bread prices were already up, spiking food prices will go up further, and 50 percent of Lebanese are under the poverty line. This is the perfect storm over the next several months,” said Martin Keulertz, assistant professor in the food security programme at the American University of Beirut.

The country’s second port, in Tripoli 80km north of the capital, is significantly smaller than Beirut’s and will struggle to handle additional cargo volumes.

“Tripoli is not really fitted out to deal with the amount of food imports needed. There is an absolute urgency to import, and the government doesn’t have the foreign currency to do that,” said Halabi.

A third shock

The disaster is the third shock to hit the country since protests erupted in October 2019, and the economic impact of the coronavirus pandemic.

Despite banks imposing informal capital controls to limit cash withdrawals, over $25bn has flowed out of the country over the past year, while the Lebanese lira has depreciated by around 80 percent to the US dollar. Public debt has also skyrocketed to $92bn, equivalent to over 170 percent of GDP.

With foreign currency having dried up, importers had been struggling to pay for goods, reflected in imports dropping by 50 percent this year, according to Lebanese Customs authority data.

The impact of the explosion on the economy could cause further falls in the lira, which has dropped from LL1,507 to the dollar to over LL8,000, which would make imports even more expensive.

“Once the markets open the lira will take a hit, but the extent of that is as yet unknown. Whatever local demand there was for lira, it is going to be dampened by people having even less economic prospects than before,” said Halabi.

The ongoing ramifications of the financial crisis will impede the economy’s ability to rebound from the explosion.

“How will businesses start up again when there are capital controls that don’t let people take money out of banks? And with a fluctuating black market rate for currency? It’s a complete disaster,” said Haytayan.

Across the board, the Lebanese economy has been on the decline, with construction permits down 60 percent, car sales down 70 percent and tourism down by half this year on 2019.

“Everything is at a standstill, and putting it all back together again will be difficult as many people had not taken out insurance to cover for this type of disaster, and the insurance companies are tied to the banking sector, which was in the doldrums due to the financial crisis,” said Halabi.

 “Many businesses will not recover.”

 This article is available in French on Middle East Eye French edition.




Supertanker state: How Qatar is gambling its future on global gas dominance

 Doha sets course to become 'Saudi Arabia of gas' with $21bn order for new shipping fleet. But with demand and prices sinking, is the emirate heading for the rocks?

 Middle East Eye:  When Saudi Arabia caused oil prices to tumble in March the impact on oil producers’ revenues was immediate. But in neighbouring Qatar, which is a leading producer of liquefied natural gas (LNG), the situation is more complicated.

Last year, LNG accounted for $45.3bn (62 percent) of Qatar’s $73.1bn in export revenues. LNG prices are linked to oil and have also plummeted since March, though with one crucial difference.

Qatar exports 77 million tonnes (MT) of LNG a year, but it sells just 6 MT of that on the spot markets for immediate delivery. Most of Qatar’s LNG revenues are tied up in medium and long-term contracts, with a time lag before any drop in oil price is felt by both sellers and buyers.

“Around about 85 percent of Qatar’s gas contracts are linked to oil, with a six-month delay, so in terms of fiscal impact it will only be felt in September. This is a problem, and there’s a debate as to what extent LNG volumes will be impacted,” said a senior member of a state-linked Qatari financial firm speaking on condition of anonymity.

“Saudi Arabia saw the impact [of the oil price drop] immediately, here we’re behind the curve.”

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Mohammed bin Salman's Vision 2030: Can Saudi Arabia afford it?

MBS's multi-trillion-dollar project was supposed to be a catalyst for social and economic reform. But Covid-19 and an oil price crash have thrown its future into doubt

Middle East Eye: “All success stories start with a vision” was blazoned across huge posters of Saudi Arabia’s crown prince in Seoul last year when Mohammed bin Salman made his first state visit to South Korea.

The slogan appears to have been directly lifted from a Saudi media consultant “applauding” the announcement of Vision 2030 by Mohammed bin Salman in 2016 to the Arab News, “to lead us to a bright future”.

But as the Vision plan starts its fifth year - and with a decade to go - the kingdom is reeling from the dual shocks of low oil prices and the economic fallout from the Covid-19 pandemic. Is there light at the end of the tunnel for Vision 2030?

When the Vision was announced to much fanfare by the then-deputy crown prince, figures were thrown around of $1tn to be invested in mega projects, and another $1tn to be attracted in foreign investment. The Public Investment Fund’s (PIF) assets would reach $2tn by 2030, it was predicted.

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