Saudi Arabia is on the brink of financial disaster, with only two or three years until bankruptcy. At least that’s what PointState Capital’s CEO Zach Schreiber thinks.
Schreiber was one of few who foresaw the epic oil crash, making a prediction in 2014 (when oil was over $100 per barrel) that led to a $1 billion profit for his firm. Now he warns that Saudi Arabia is in trouble.
As if the oil crash wasn’t bad enough for the world’s largest oil provider, Saudi Arabia is also embroiled in the turbulent politics of the Middle East and is a breeding ground for terrorists. The kingdom has slashed spending and is scrambling to raise cash amidst painfully low oil prices. The country’s longtime oil minister Ali Al-Naimi was fired this past weekend.
“Saudi has two to three years of runway before it hits a wall,” said Schreiber last week, noting that cheap oil and huge spending commitments will lead to structural insolvency. “No wonder they’re now issuing tons of debt.”
Saudi Arabia has plans to take out a $10 billion loan from a collection of banks, potentially paving the way for the kingdom’s first international bond sale.
The country needs oil prices of $100 or more just to break even on a national budget that was created during years of immense profit.
The country’s “lavish social spending program is on a collision course,” with cheap oil, says Schreiber. Along with a 50% gas price hike, the country has started to withdraw many of the benfits enjoyed by its enormous population in recent years.
The kingdom cut defense spending by 3.6% this year, but can’t afford much more considering the ongoing conflict with Iran and the threat of civil uprising. “Saudi is the last bastion of stability, but they hold that position at ever-expanding salary cost,” says Schreiber of the country’s massive military budget.
Saudi has roughly $600 billion stored away for emergencies, but has burned through $140 billion in the past 16 months. The country’s balance sheet is “overstated and misunderstood,” argues Schreiber, pointing to $340 billion worth of liabilities that minimize the size of the emergency fund.
These concerns may be part of the reason Saudi has decided to sell a 5% stake in its most treasured possession: Saudi Aramco.
Saudi Aramco, based in Dhahran, is the world’s largest oil company.
“If they sell the golden goose, how do they fund anything? It’s insane. Saudi is mortgaging away its future to buy time,” says Schreiber.
Schreiber is bearish on oil prices in the long-term. He notes that the strengthening of the US dollar would make oil and other commodities more expensive for foreign buyers. Coupled with the “explosion of debt” in China and the rising popularity of electric cars, Saudi Arabia’s future looks grim indeed.
Schreiber encourages investors to buy the US dollar while betting against the Saudi riyal. “Let’s hope for the best and hedge for the worse,” he says.