Saudi Arabia’s pockets are deep enough to weather oil price slump
John Sfakianakis
“Saudi Arabia managed to save a lot of money from the oil rally”
The recent slump in the price of crude oil has led many to predict Saudi Arabia’s imminent economic collapse. The country derives more than 80pc of its total revenues from the sale of black gold, according to official government figures.
It clearly has to change how it operates: spending cuts and other measures to tackle the deficit are needed over the next few years.
But things are not as bad as they may look at first glance. Saudi Arabia managed to save a lot of money from the oil rally between the early 2000s and last year.
As a result, by the end of 2015, the Kingdom’s foreign reserves will total more than 100pc of its gross domestic product. This is more than enough for the country to cover its import needs, support any future external debt requirements and defend its currency peg.
True, Saudi Arabia has spent $80bn (£53bn) of its reserves since the start of the year, which is to be expected given the shortfall in revenues as a result of the fall in the price of crude. But reserve depletion in the 1980s and 1990s was much faster than it is today.
And true, Saudi Arabia is spending more than it’s earning. This year, Saudi Arabia will run a deficit of close to 20pc of gross domestic product (GDP), according to calculations by the International Monetary Fund.
But this is not a new phenomenon. Saudi Arabia ran up fiscal deficits every year between 1983 and 1999. During that time it had to bankroll the first Gulf War, which cost the Kingdom more than half of its annual output, and also had to deal with a much lower oil price than even today.
Last month, Standard and Poor’s downgraded Saudi Arabia’s credit rating by one notch. This is by no means a disaster. It suggests that the country still has the ability to meet its financial commitments but is now somewhat more susceptible to the adverse effects of changes in economic conditions. In fact, S&P expects Saudi Arabia’s fiscal deficit to fall to a mere 5pc in 2018 if the average price of oil rallies to around $63.
Saudi Arabia has two additional aces up its sleeve: strong institutions and low government debt. According to rating agency Moody’s and its Worldwide Governance Indicators, Saudi Arabia enjoys a high degree of policy credibility.
Things have improved tremendously since the first half of 2015. The ruling council members (government ministers) have been grouped into two areas: the Council of Economic and Development Affairs and the Council of Political and Security Affairs.
Late last month, Saudi Arabia set up a new body that aims to improve government efficiency. The National Centre for Measuring the Performance of Government Agencies is part of a wider drive by Deputy Crown Prince Mohammed bin Salman to streamline the country’s decision-making processes.
Policies that were once thought of as taboo and marred by vested interests are now seriously being considered as future policy options. For example, the Shura Council, the formal advisory body in Saudi Arabia that proposes laws to the king and his cabinet, has drawn up a draft law on taxing so-called “white lands”, undeveloped plots in urban areas.
It is hoped that such a move (if approved by the king) will help the country, which has a young and growing population, tackle its housing shortage. The Kingdom has also established a Commission for Job Generation and Anti-Unemployment in a bid to combat rising unemployment among young people.
Saudi Arabia’s second ace up its sleeve is its low debt level. During the boom years, it managed to pay off nearly all of its debt, which reached a high of 100pc of GDP in 1999. And, despite tapping the bond markets earlier this year, the country’s debt to GDP is expected to reach only 6pc by the end of 2015, according to Moody’s. Saudi Arabia has the lowest debt to GDP ratio of any G20 country.
The country is poised to announce its 2016 budget, which will give it the opportunity to prove it can rein in expenditure and run a leaner, more disciplined economy.
Domestic and regional politics always play a role in sentiment towards Saudi Arabia. Here, too, there is less cause for concern than some have made out. It was common during the late King Abdullah’s reign to worry about the country’s fragile future in the event of a potentially turbulent leadership succession. In fact, King Salman’s accession in January was remarkably smooth, allaying any fears about instability within the royal family.
Regional geopolitical matters are another area of concern for many observers. True, Saudi Arabia’s military intervention in Yemen, together with its Arab allies, is a new development.
But the country is used to regional instability of one sort or another: the oil slump in the 1980s and 1990s was accompanied by the Iran-Iraq war, civil war in Lebanon and Algeria, turmoil in Sudan and the first Gulf War. Through all this, Saudi Arabia maintained its own stability.
Nobody knows what will happen to the price of oil in the coming year. What is certain is that the energy market has changed with the advent of technological improvements and the production of shale oil and gas, which is almost certainly here to stay.
However, the Kingdom’s dominant position within the Organisation of the Petroleum Exporting Countries, with more spare capacity than all of the other members combined, makes it a geopolitically important ally for the US and other industrialised nations.
There is no doubt that Saudi Arabia faces many challenges and time is of the essence. All its policymakers are aware of this.
The country needs to diversify its economy, create more jobs, embark on a programme of privatisation and tackle the high level of domestic energy consumption.
However, there is no better time for the Kingdom to adopt change than now. The dynamism that is permeating Saudi Arabia’s new thinking should provide confidence that the nation’s economy is solid and is in no danger of crashing and burning.
John Sfakianakis is director of the Ashmore Group for the Middle East. The views expressed are his own.
