The Reports of Saudi Arabia’s Death Have Been Greatly Exaggerated
The kingdom’s economy isn’t teetering on collapse; in fact, it’s healthier than it has been in decades.
The collapse in oil prices, which have more than halved from their previous peaks, has not been painless for Saudi Arabia. However, it’s far too soon to start writing the kingdom’s obituary: Its economy is far better insulated now than it was during the slump of the 1980s and 1990s, when oil reached below $10 a barrel in 1998.
Although spending increased in the oil boom years of the 2000s, Saudi Arabia saved quite a bit of money during this time. Cash reserves as a ratio of GDP reached close to 100 percent in 2014, whereas in the 1980s and 1990s they barely reached 35 percent. Inequality is also declining: As per the latest household and income expenditure survey, the Gini coefficient, a common measure of inequality, stood at 45.9 in 2013, down from 51.3 in 2007.
Saudi Arabia will not incur a fiscal or currency crisis of any sorts for the next few years. Its balance sheet has recently made tremendous improvements: Public debt fell from a peak of 119 percent in the late 1990s to 1.6 percent in 2014, lowest in the world. This would be the envy of any developed economy.
During the years of plenty, Saudi Arabia amassed a significant war chest that will help it survive the current low oil prices. It is sitting on foreign reserves of more than $650 billion and has plenty more firepower sitting in other public sector coffers. The recent chatter that low oil prices are leading to speculation against the Saudi riyal will amount to nothing: Saudi authorities are very cognizant that this is not the right time to be thinking of any currency regime change. Moreover, the Saudi Arabian Monetary Agency (SAMA) is perfectly financially capable of defending the currency. In the past, speculators have taken punts on the currency in the 1990s and 2000s with large losses.
The International Monetary Fund is forecasting that Saudi Arabia will run a nearly 20 percent budget deficit for 2015. History shows this to be perfectly manageable: From 1983 to 1991, the kingdom’s budget deficit averaged 52 percent, with 1991 being the highest on record at 77 percent. Saudi Arabia has long departed from these years of appalling fiscal numbers, and the economy is far away from being in the recessionary spiral of the 1980s and 1990s.
Saudi Arabia’s financial sector is also well-positioned to weather the growth slowdown. Non-performing loans are low, coming in at just 1.1 percent of total loans at the end of 2014. Bank reserves are very high: For every 1 million riyals in non-performing loans, there are 1.8 million riyals in bank reserves. As the IMF noted in its most recent report on Saudi Arabia, banks would only come under significant liquidity pressure in the event of substantial deposit withdrawals — something that has not happened in previous periods of oil price declines.
King Salman’s institutional reforms, most notably disbanding 12 ministerial committees and forming the Council of Economic and Development Affairs to handle part of their responsibilities, have made decision-making more nimble and efficient. Ministries are now required to have a Project Management Office to follow up on projects and make them more effective. Proposals for expenditure cuts have also been discussed since the early summer months.
The size and duration of the drop in oil prices will be essential in determining its economic impact. But whether this is a long-term shift or something more temporary, government spending will not rise endlessly. Over the medium term, the growth of government expenditure is expected to slow as one-off spending measures instituted this year end. A number of large ongoing infrastructure projects will also be completed soon, while others — such as the Riyadh and Jeddah metro — will be prolonged; still others, such as the building of new sports stadiums, will be postponed. The government is also keenly aware that ports and airports, as well as other infrastructure facilities, will have to be privatized, and is moving in that direction.
Privatization of state-owned enterprises has already begun, with the sale of part of the government’s stake in the National Commercial Bank. The government is focusing on developing industrial clusters around oil and mining, and joint ventures in refining, mining, petrochemicals, automobiles, pharmaceuticals, and banking. As part of the government’s continuous drive toward economic liberalization, the Saudi stock market — one of the largest in emerging markets and one of the most liquid in the region — opened its doors earlier this year to foreigners. The presence of foreign investors in the past has been very limited, as they were previously allowed to invest only through equity swap arrangements and participate in mutual funds or exchange-traded funds.
Saudi Arabia still remains hugely dependent on its energy exports — some 87 percent of its revenue came from oil in 2014. And it’s true that diversification has proved easier said than done. Education and human capital enhancement is a prerequisite: Employment grew by 3.2 percent in 2014, with non-Saudi employment growing by 2.2 percent and Saudi by 4.4 percent. This is a positive step for an economy that was hiring only expats in the private sector for decades. Labor market reforms, together with investments in affordable housing to help younger people and the less well-off population enter the housing market, are key elements of the government’s policy agenda. The government has also introduced a number of initiatives targeting mainly youth and female workers, including opening a number of sectors to female employment.
The average Saudi, it’s important to remember, hasn’t seen his income decline drastically due to the decline in oil prices — a protracted slump would have to be sustained for many years until wealth destruction is widely felt.
It’s a truism that the era of abundance, high fiscal surpluses, and rising over-spending has come to an end. But Saudi Arabia is also not about to come apart at the seams: Its economy is a long way from bankruptcy, and the kingdom is far better equipped to tackle the challenges of job creation, education, and diversification than it was in years past. Saudi Arabia faces many challenges in the years ahead, but reports of its demise have been greatly exaggerated.
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