Print
Email
Share
Facebook
Twitter
LinkedInOil is trading above $120.
Saudi Arabia exports more oil than anyone else. It isn’t unrealistic to think the Saudis oil export revenue could approach $400 billion a year if oil stays above $120.
Saudi economic development has lagged the Gulf boom towns of Doha, Dubai and Abu Dhabi. Paul Murphy, quoting Goldman’s Ahmet Akarli:
the Saudi economy has lagged badly behind its peers in the Gulf region in terms of both per capita income and overall living standards – in particular, it lags the rapidly diversifying and prosperous economies of the UAE, Kuwait and Qatar.
The right policy course: a bit of austerity. Yep, spending cuts. Or least slower spending increases.
That at least is what the Saudi central bank governor suggests. The FT reports:
Saudi Arabia’s central bank governor on Tuesday called on the government to fight inflation by curbing public expenditure, warning that economic policies in the kingdom faced “a critical situation” ….
“The Saudi Arabian Monetary Agency [the central bank] has taken steps to reduce domestic liquidity by raising the statutory reserve requirement several times. Given the dominance of fiscal policies on the economy, it is necessary to reprioritise spending and programme it to fit the absorptive capacity of the national economy,” Mr Sayari added.
The IMF – which has been arguing for maintaining the dollar peg and limiting inflation with spending cuts – presumably approves. The IMF’s advice to Oman is presumably not that different from its advice to the Saudis. Not that the IMF’s views matter. The US, which is rumored to have put pressure on the Saudis to maintain their peg to the dollar, presumably does too.
Basically, SAMA and the IMF want the Saudis and the Gulf to spend more on global financial assets – as the fiscal contraction only will fight inflation if the oil revenue is sequestered abroad – and less at home.
All just to maintain a peg to a currency that isn’t a good fit for an oil-exporting region.
A currency that rises and falls with oil makes a lot more sense for an oil exporting economy than a currency that falls when oil rises and rises when oil falls.
Right now, the Saudis are trying to cut spending in the face of a (positive) oil shock in order to squeeze the Saudi economy into a depreciated currency.
They should be allowing a stronger currency to create more economic space to enjoy the oil boom. Or at least room to spread the benefits of the oil boom a bit more widely.
A stronger riyal – assuming the rise in riyal was real not cosmetic — would make more domestic spending and investment consistent with lower levels of inflation.
In the 1990s, the Saudis had to cut back because they weren’t getting enough revenue from the oil. The rising dollar added to strong deflationary pressures. Real rates rose. Now, the Saudis face pressure to cut back even as oil soars at least in part because they have pegged their currency to the depreciating dollar.
I rather suspect the current policy won’t work. The Saudis cannot cut spending enough to really bring about a real depreciation of the riyal. Not with rising public expectations and tons of petrocash.
Goldman’s Akarli expects Saudi inflation to soon reach 15%. I suspect he is right. And there is a real risk that the resulting period of negative real interest rates will only add to the Gulf’s history of following big booms with big busts.
Well, Hillary is going to fix all that. She has said she will stop OPEC being a cartel, somehow. Then, of course, the price of oil will drop, etc., etc., and the problem won’t exist. LOL.
I am afraid hillary will have even less influence over OPEC than W. But maybe I am misunderestimating her
It’s hard to misunderestimate her when she misunderstates *everything*
"Sure, it’s not much money, but what if this were attacking Iran instead and she declared she was just going to do it anyway?" http://www.portfolio.com/views/blogs/market-movers/2008/05/06/clinton-vs-the-economists
"At this point, the ability of US policymakers to chart a middle course — or hold in economic purgatory — is dependent upon the willingness of the rest of the world to continue to enable the process via continued accumulation of US assets. Rising inflation could trigger a policy shift abroad… How much US debt will the rest of the world absorb?
Timing is a critical issue — many have predicted that sustained fiscal imprudence and internal imbalance will end disastrously when foreign agents cease accumulating Dollars, only to learn that they have grossly underestimated the willingness of foreigners to enable US spending. The benefits of maintaining the current international financial architecture apparently still outweigh the costs. Rising global inflation is challenging that calculus — but it may have to go much higher to significantly impact policy. Which suggests that even with a Fed pause, the commodity price boom is still in its early stages… The US position remains precarious, with a delicate combination of monetary and fiscal policy, combined with substantial external support, keeping the train on the tracks. It is simply far too easy to envision a scenario — excessive US stimulus coupled with a loss of foreign support — that switches the train to a broken track." http://economistsview.typepad.com/economistsview/2008/05/fed-watch-the-c.html
If economics is the only consideration, the obvious choice would be to lower production and reduce export. That would surely piss off even more people outside of Saudi though.