Increasing concern in Britain over Saudi Arabian financial situation
Notebook: Sheik's turn to be put over a barrel
The Guardian
The effect of the fall in crude oil prices is becoming increasingly evident in parts of corporate
Britain. Huge holes have been blown in the profits of Shell and BP Amoco, and the Ministry of
Defence, joined by BAe, has been required to issue a a categorical denial that the Al-Yamamah
defence contract - often described as the biggest in the world - has been frozen.
Details of Al-Yamamah are secret but we know BAe is paid for its pounds 1 billion of annual
work on the contract, under an oil-barter agreement and that last year Saudi Arabia fell behind in
its cash top-up payments, although these were made good by the time of the Marconi defence
merger early this year. Nevertheless, renewed concerns about the contract contributed to a 5 per
cent decline in BAe's share price yesterday.
So what credibility should be attached to the reports that the Saudis are having financial
problems? Quite a bit. For a start, after years of holding the big US oil companies at bay, Riyadh
is welcoming them back. The US oil companies want more access to Saudi Arabia's reserves of
261 billion barrels of oil, but as yet there is no sign of that happening. But the Saudis do want US
assistance in exploiting new, cheaper oil-extraction technologies and reserves of natural gas.
The Saudi ferment is attracting a great deal of interest in the US and Britain. As well as being an
important strategic player in the Gulf region, Saudi Arabia is one of the pillars of the international
financial system. It is, for instance, a contributor to the IMF's emergency fund, the General
Arrangements to Borrow, used for big rescue operations.
Some leading bankers and credit-rating agencies already have the Saudis on their watch list,
however. It may not yet be the next Brazil but the country's problems are becoming more
pronounced. The 40 per cent decline in crude oil prices in 1998 knocked a big hole in the
country's public finances and led to an estimated drop of as much as 12 per cent in gross
domestic product. With big oil companies working on the assumption of a $10-a-barrel price for
crude in 1999, the prospects for revival this year seem unlikely.
The Riyadh government's spending plans are based on higher income expectations, so the
national debt has ballooned to $120 billion, more than 120 per cent of GDP, replicating some of
the problems in other emerging markets. Some steep cuts in defence spending have been made
already, including a $1.8 billion artillery deal with South Africa. Riyahd would dearly like to start
to commercialise its natural gas assets, providing a new stream of income. But some estimates
from the region suggest that the cost of such a strategy could be $40 billion - which it does not
have. This would require the assistance of big oil companies and the banking sector. The former,
despite their own problems, might be willing to play banker for some corporate participation. As
for the bankers, Saudi Arabia is not on the list of favoured creditors at the moment. How far the
financially mighty have fallen! |
