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Saudi Arabia strong enough to endure oil decline

Oil has been on a steady decline in the past several months due to a surplus of the precious black liquid. While some have predicted this could seriously dent Saudi Arabia’s oil-backed economy, others are skeptical due to the fact that the state was able to save a lot of money from the rally of oil that occurred back in 2000 until last year.

According to public records, Saudi Arabia’s foreign reserves will be over 100pc of its gross domestic product, which is more than enough to weather the expenses and support the incoming debt requirements while the price of oil continues to decline.

As a part of Saudi Arabia’s methods to endure the decline, the country intends on limiting spending, as well as  minimizing government subsidies on gas. The International Monetary Fund has been telling Saudi Arabia to review energy subsidies as a way to control budget deficits that are expected to grow by up to 20% before the year ends.

The state has spent over $80 billion of its reserves since the beginning of 2015. The number seems huge compared to other states that export oil but the truth of the matter is, Saudi Arabia is spending more than it’s earning. This isn’t something new, however, as Saudi Arabia had fiscal
deficits every year from 1983 to 1999. During that time, it was able to withstand the decline regardless of the price of oil being much lower back then.

In fact, most companies that operate in the Middle East aren’t really worried about the slump, and some are even upgrading their facilities for the manufacturing of oil. Basrah Gas Company in July announced one of the biggest projects in the Middle East this year, which will include the rehabilitation of its West Qurna compressor stations that would entail flared associated gas in oil fields to be collected, compressed, and dehydrated via a pipeline.

In October, Standard and Poor reduced Saudi Arabia’s credit rating by a notch but this isn’t as bad as receiving a credit rating “to junk”, just like what happened to Brazil. The nick on the Saudi Arabia’s credit rating means that it is still able to pay its debts but is somewhat more vulnerable to the effects of the volatility of oil.