Saudi Arabia’s Tadawul All Share Index experienced a significant decline, closing down 7.4% on Sunday, marking its steepest single-day drop since March 2020. This downturn erased over $130 billion in market value, reflecting investor concerns over the escalating oil price war and the kingdom’s economic adjustments.
The sharp decline in TASI was primarily driven by the collapse of negotiations between the Organization of the Petroleum Exporting Countries and Russia regarding oil production cuts. On March 6, 2020, Russia rejected OPEC’s proposal to reduce output, leading Saudi Arabia to initiate a price war by significantly lowering its oil prices and increasing production. This move resulted in a 25% drop in oil prices, with Brent crude falling to $28.94 per barrel.
The oil price war’s impact on the Saudi economy has been profound. Oil revenues, which constitute approximately 77% of the kingdom’s total income, have seen a 23% decrease compared to the previous year. In response to the fiscal strain, the Saudi government announced public spending cuts and increased taxes, including a rise in the value-added tax from 5% to 15%, effective from July 1, 2020. These measures aim to address the budget deficit exacerbated by declining oil prices and the economic effects of the COVID-19 pandemic.
The market’s downturn was widespread, with major sectors such as petrochemicals and banking experiencing significant losses. Saudi Basic Industries Corporation , the kingdom’s largest petrochemical producer, saw its shares tumble by 8.3%, while Al Rajhi Bank’s shares declined by 6.7%. The sell-off extended to other regional markets, with the Dubai Financial Market closing down 7% amid similar concerns over oil prices and economic stability.
Analysts attribute the market’s volatility to the dual challenges of the oil price war and the global economic slowdown induced by the COVID-19 pandemic. The pandemic has led to a significant reduction in global oil demand, further pressuring oil-exporting nations like Saudi Arabia. The International Energy Agency forecasted that oil demand growth in 2020 would be the smallest since 2011, highlighting the severity of the situation.
