Paul Wetterwald, chief economist for investment intelligence at Indosuez Wealth Management, weighs in on the impact of the Abqaiq attack on the Saudi economy.
Saudi Arabia’s nominal GDP was SAR 718,543mn ($191,563mn) in Q1 2019. Crude petroleum and natural gas extraction represented approximately SAR 188,759mn ($50,323mn) and petroleum refinery was SAR 27,251mn ($7,265mn), together representing around 30% of nominal GDP. Assuming that half of its daily capacity is lost, this would translate into a yearly GDP loss of 15%, or 0.3% per week. Thus, the length of the loss of capacity is of the utmost importance here.
However, this simplistic calculation does not take into account the negative second round effects linked to other sectors of the economy, nor the positive ones (linked to the rebuilding process, as in the case of climate catastrophes).
As can be seen on the chart above, the current oil price is now 10% higher than its 2019 average. Therefore, the loss in revenue for the Saudi government due to the decrease of production will be mitigated by the higher price.
Again, let’s assume that production is cut by half, then the government revenue could be 45% lower (1 – (100 x 0.5 x 1.1)). What does this mean in terms of deficit and debt as percentage of nominal GDP?
Prior to the attack, the current oil price would not have been high enough to balance the Saudi budget. According to the IMF (Fiscal Monitor, April 2019), the general government deficit could have been as high as 7.9% of GDP in 2019, which translates into a deteriorating net debt-to-GDP ratio. The IMF forecasted that the general government revenue would be 31.3% of GDP in 2019.
If we apply this rate of government revenue loss to this latter figure and taking into account the decrease in nominal GDP, this would push the debt to GDP ratio up to 50%. This would make the Aramco IPO all the more necessary, at a time when it seems much less attractive.
To conclude on a positive note, the rough figures that we have computed rely on an assumption that the disruption lasts for one whole year, which is a worst case scenario.