Dire scenarios for KSA’s economy due to the oil crisis

Dire scenarios are threatening the Kingdom’s economy due to the oil crisis sparked by Crown Prince Mohammed bin Salman to reduce prices and increase production in his struggle with Russia.

Moody’s financial consultancy said that the contribution of oil revenues to the GDP of the crude exporting countries, foremost of which is the Kingdom of Saudi Arabia, will decline this year.

The estimates of the International Corporation stated that the percentage will decline between 4 and 8 percent for the Kingdom, which will increase the budget deficit that was originally held, noting that its estimates are based on a price of a barrel of oil ranging between 40 and 45 dollars.

The International Monetary Fund suggested that the Middle East and North Africa region will witness a “significant decline” in growth this year in light of measures to protect against the new Corona virus and low oil prices.

In the report, the Fund urged the governments of the Middle East and North Africa to continue providing financial and economic support packages to prevent the crisis from developing into a long-term recession that will lead to high unemployment rates.

“The region is likely to see a significant decline in growth rates this year,” said Jihad Azour, regional director of the Middle East and Central Asia at the International Monetary Fund.

He added that 12 countries from the region have already contacted the IMF to obtain financial support, with the Executive Council deciding on the requests “in the coming days.”

The International Monetary Fund has already reduced its growth forecasts in the MENA region dramatically due to lower oil prices, disputes and sanctions on Iran.

The overall growth rate has been about one percent in the region in recent years.

Azour said that the region, which includes nearly two thirds of the world’s crude oil resources, was severely affected by the emerging Coronavirus and falling oil prices, explaining that “the epidemic has become the biggest challenge in the near term for the region.”

“The epidemic is causing major economic turmoil in the region by provoking simultaneous shocks, including declining domestic and external demand, declining trade, disrupting production, declining consumer confidence and financial tightening.”

Azour pointed out that the measures to reduce the virus are harmful to major job-rich sectors such as tourism, hospitality and retail, which may lead to increased unemployment and lower wages.

The head of the International Monetary Fund, Kristalina Georgieva, said on Monday that global economic growth will be negative this year and may be worse than the global financial crisis of 2008.

Several countries in the region have taken tough decisions to limit the spread of the virus, including stopping flights, suspending the study, closing major shopping centers, and imposing a curfew.

The virus has killed hundreds of people in Iran and dozens of others in countries in the region.

For its part, Fitch Ratings said that the drop in crude oil prices at current levels or slightly higher would weaken the financial reserves of the Kingdom and the rest of the Gulf Cooperation Council countries.

Fitch stated that Gulf budgets will suffer directly from measures such as suspending various government fees and taxes, but they constitute a small share of total revenues, and will in any case decrease as a result of the slowdown in non-oil activity.

“We expect that the mix of financing in the Gulf Cooperation Council countries will shift in favor of withdrawing from financial reserves,” it is expected that “the Gulf Cooperation Council will issue about 42 billion dollars in foreign debt this year, from 48 billion dollars last year; this will be accompanied by 110 Billions of dollars in withdrawals from financial reserves and wealth funds, compared to only 15 billion dollars in 2019.

The cost of securing exposure to the Kingdom’s debt rose two days ago, and IHS Market data showed that Saudi Arabia’s five-year credit risk swap contracts rose to a record level of 233 basis points, after recording 198 basis points at the close on Friday.