Complex Made Simple

Can Saudi Arabia cope with oil volatility?

The government is confident of the economy, however petrochemical firms are reporting a slump in results

Energy companies in the oil-rich kingdom have started witnessing a major dent in their first-quarter results, compared with the same period last year.

Revenues at one of the world’s largest petrochemical groups, Saudi Basic Industries Corp (SABIC) fell by 28 per cent from a year earlier to $9.48 billion.

The management blamed the slide in oil and petrochemical product prices for the bad results.

The oil-rich kingdom’s Petro Rabigh, a joint venture between Saudi Aramco and Japan’s Sumitomo Chemical announced its first quarter results on Sunday with a 50.3 per cent drop in profits.

According to Petro Rabigh, the slump in results was due to lower profit margins on its petrochemical products, the prices of which are closely linked to oil prices, which have been falling consistently since mid-2014.

Interestingly, Saudi producers benefit from subsidised energy and feedstock costs, so lower oil prices shrink their margins.

Riding out of crisis

However, Saudi finance minister Ibrahim Al-Assaf reiterates that the kingdom is capable of dealing with the current instability in oil prices.

Assaf made his remarks at the International Monetary and Financial Committee of the International Monetary Fund.

The minister led the kingdom’s delegation to the spring meetings of the International Monetary Fund and the World Bank in Washington.

In his speech, Al-Assaf says the ratio of public debt to GDP in his country was 1.6 per cent by the end of last year, according to Egypt-based Youm7.

In this context, the Saudi minister explains that the kingdom continues to give priority to investment programmes in the field of infrastructure, education, health and social services, in order to achieve sustainable economic growth that is capable of providing jobs.

Al-Assaf states the banking sector still maintains good rates of liquidity, profitability and capital, noting that the recent reforms strengthen the regulation of the financial sector, help support sustainable economic development and provide financing for small and medium enterprises.

It is noteworthy that John Sfakianakis, regional director for the GCC at Ashmore, said in an earlier statement that the decline in oil prices is normal and that Saudi Arabia is capable of facing the fluctuations in prices due to its large foreign reserves.

True enough, there could be a large reserve. However, data suggests Saudi Arabia is drawing down foreign reserves to cover up deficit.

The central bank’s net foreign assets fell by 1.4 per cent from a year earlier to $707 billion in February, according to monthly central bank statistics.

It was the first year-on-year drop since February 2010, when Saudi Arabia was affected by the global financial crisis.