Catch 22 in Saudi Arabia

According to market rumors which circulated yesterday budget cuts are finally on the table in Saudi Arabia. How could it be any other way with a budget deficit in excess of 20% of GDP? The large deficit is the result of the decline in the oil price. 

If the Saudis followed the Russian example and allowed for a floating exchange rate rather than the current peg, this would improve SAR denominated oil revenues and consequently less severe budget cuts would be required. 

"However, this is unlikely in the short term and is not our base case scenario. Things would have to get a lot worse before the Saudis abandon the USD-SAR peg, which has been a long standing policy feature. The large budget deficit indicates that the decision to flood the market with cheaper oil and knock out higher cost producers is not a costless policy from the Saudis' perspective", argues Commerzbank. 

The problem of course is that if the Saudis indicate a decrease in production it sends a signal to higher cost producers that higher prices are on the way.