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Portraits of Mohammed bin Salman, Saudi Arabia's crown prince and King Salman of Saudi Arabia sit on display at a construction site in the King Abdullah Financial District (KAFD) in Riyadh, Saudi Arabia, on Tuesday, May 19, 2020. Hit simultaneously by plunging crude prices and coronavirus shutdowns, the non-oil economy is expected to contract for the first time in over 30 years. (Photo: Tasneem Alsultan/Bloomberg)

Saudi Arabia may face budget squeeze after 2021, Moody’s says

Portraits of Mohammed bin Salman, Saudi Arabia's crown prince and King Salman of Saudi Arabia sit on display at a construction site in the King Abdullah Financial District (KAFD) in Riyadh, Saudi Arabia, on Tuesday, May 19, 2020. Hit simultaneously by plunging crude prices and coronavirus shutdowns, the non-oil economy is expected to contract for the first time in over 30 years. (Photo: Tasneem Alsultan/Bloomberg)

Saudi Arabia may not be able to rely on annual dividends of almost US$75 billion from State oil company Saudi Aramco beyond next year unless crude prices increase, according to Moody’s Investors Service.

The Government, which owns 98 per cent of Aramco, has depended on the dividend to help plug its budget deficit.

An employee visits the site of crude oil storage tanks at the Juaymah tank farm at Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Ras Tanura, Saudi Arabia, on Monday, October 1, 2018. Saudi Aramco has reaffirmed its commitment to paying out US$75 million in dividends to shareholders over the next five years. (Photo: Bloomberg)

“The Government is unlikely to be able to repeat the manoeuvre beyond 2021,” Moody’s said in a report. This is the case “particularly when taking into account Saudi Aramco’s own capital expenditure needs and its commitment” to buying Saudi Basic Industries Corp.

Aramco agreed earlier this year to buy 70 per cent of the chemicals maker from the Government’s Public Investment Fund for US$69 billion.

Aramco pledged during its 2019 initial public offering to pay out US$75 billion to shareholders during its first five years as a publicly traded company. It has since reaffirmed that commitment. Yet, crude prices have fallen amid the coronavirus pandemic and are 35 per cent lower this year. Aramco, meanwhile, is pumping and selling less oil under a deal among global producers to reduce supply.

Saudi Basic Industries Corporation (Photo: Al Arabiya)

To honour its dividend pledge, the world’s biggest exporter has said it would decrease spending and has laid off hundreds of workers and announced plans to sell off non-core assets.

Despite taking these steps, the company’s gearing ratio has risen, from -5.0 per cent at the end of March — meaning Aramco had more cash than debt — to 20 per cent in June, above its targeted range of 5.0 per cent to 15 per cent. That’s largely due to the debt it took on to acquire SABIC.

Moody’s Investors Service has predicted that Saudi Aramco’s goal of paying out US$75 million dividends to shareholders over the next five years is not sustainable given the state ofoil prices globally. (File photo)

Saudi Arabia last week published an overview of its spending plans for the next three years that envisages annual cuts to help contain its budget deficit. The plans were based on oil prices of around US$50 a barrel, according to a Goldman Sachs Group Inc analysis. Benchmark Brent crude was trading Thursday for around US$43 a barrel.

— Bloomberg