(Bloomberg) — Saudi Aramco will have a crucial decision to make early next year: Cut its $31 billion quarterly dividend and risk a worsening of the kingdom’s budget deficit, or continue borrowing to keep paying.

The world’s largest oil exporter is a key cog in the Saudi financial system, with its crude sales and generous payments helping finance Crown Prince Mohammed Bin Salman’s multitrillion-dollar spending plans. The kingdom’s budget is shrinking as oil prices remain low and production remains near its lowest levels in three years.

The addiction is putting increasing pressure on Aramco’s balance sheet as it gives away more than it earns, putting the company in a net debt position in the third quarter. This is a sharp turnaround for the firm, which had over $27 billion in net cash just a year ago.

It is common for major oil companies to use their balance sheets to increase borrowing during periods of high oil prices so that they can continue to pay shareholders. The situation is no different in Aramco. The company sold nearly $8 billion in bonds in 2020 as the Covid-19 pandemic sent crude oil prices crashing, and sold another $6 billion the following year. Chief Financial Officer Ziad Al-Murshed said in recent conference calls that raising debt is not necessarily a bad thing, given low leverage.

The net debt-to-equity ratio of about 2% is low compared with the double-digit leverage ratio for most global oil majors, according to Bloomberg Intelligence data. The company had net debt of $8.9 billion in the third quarter, while BP Plc’s was $24 billion and Shell Plc’s was $35 billion.

“Leverage remains low and is another tool used globally by large companies to avoid cutting dividends when cash flows fluctuate,” said Anita Gupta, head of equity strategy at Dubai lender Emirates NBD PJSC.

Two-Part Dividend

Aramco’s dividends are divided into two parts: a base payout of $20.3 billion per quarter, which eats up about 95% of free cash flow, and a performance-related portion, pegged at $10.8 billion per quarter this year. The special component, initially based on huge profits from the oil boom following Russia’s invasion of Ukraine, will be paid out as a percentage of free cash flow from next year.

Aramco has more borrowing space, which could help keep the dividend near current levels, according to HSBC Holdings Plc analyst Kim Fustier.

Fustier said in a September interview that allowing the balance sheet to finish 2025 down about 10% would “free up or allow the company to pay $30 billion in special dividends in 2025.”

This will be a boon for the government budget. The kingdom forecast a deeper deficit than previously anticipated in October, and the deficit is projected to continue until 2027. It needs crude oil at around $96 a barrel to balance its budget, much higher than current prices. Export revenue from oil fell to its lowest level in three years in August.

Aramco raised $6 billion in bonds in July, making its first dollar-denominated debt offering in three years. In September, it sold $3 billion worth of dollar-denominated Islamic bonds. More borrowing would add to the $50 billion the Saudi government and institutions such as the Public Investment Fund have issued in bonds in 2024, making it one of the largest international debt issuers in emerging markets this year.

Still, the weak outlook for oil means Aramco needs to be careful not to put too much stress on the balance sheet. Saudi Arabia and other countries in the OPEC+ alliance on Sunday postponed a gradual increase in production to next year for a second time as crude oil prices continue to struggle with a fragile economic outlook. Brent crude oil in London has fallen 13 percent in the last four months.

“Aramco still has a strong balance sheet and a solid financial position, so the dividend could be maintained in 2025 if management is happy with higher leverage,” said Bloomberg Intelligence analyst Salih Yilmaz. But this is not a sustainable situation in the long term.”

–With help from Omar Tamo.

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