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Saudi Arabia facing crisis due to oil prices, deficit and pegged currency, say investors

Low oil prices, budget deficits and a currency pegged to the US dollar could all contribute to a crisis in Saudi Arabia in the next three to five years, investors have said.23 Nov 2015

"If Saudi Arabia buckles, we have a huge problem, on a scale that is not comparable to what we are contemplating at this point," Stephen Jen, founder of macro hedge fund SLJ Partners, told a panel discussion at the Reuters Global Investment Outlook Summit.

"Saudi can be a problem in three to five years if they run a deficit of 20%-plus," Mauro Ratto, head of emerging markets at Pioneer Investments, told Reuters.

Investors also noted the impact of geopolitical risk, saying that if the recent attacks in Paris were replicated in the Gulf region, oil prices would rise. This would help countries like Saudi Arabia but would "wreck funds' baseline calculations for 2016 investments," investors told the summit.

Christine Lagarde, managing director of the International Monetary Fund (IMF), said this month that Gulf countries should introduce a regional value-added tax (VAT) as soon as possible to raise revenues at a time of low oil prices.

“At the moment, a large share of fiscal and export revenues in the GCC come from oil," she said at a meeting in Doha with the finance ministers and central bank governors of the Gulf Cooperation Council (GCC).

"With oil prices having declined sharply since mid-2014, export revenues are expected to be nearly $275 billion lower in 2015 than in 2014. The fiscal and current account balances in the region are deteriorating sharply, with the fiscal balance projected by the IMF to be in a deficit of 12.7% of GDP in 2015.