An new economy in Saudi Arabia?

A piece in Foreign Affairs argues that Saudi Arabia will halt an “oil economy collapse”.

It opens “The September 11 collapse of a crane at the Grand Mosque in Mecca provided a grave metaphor for Saudi Arabia experts. A number of observers, citing supposed infighting among senior Saudi royals, have predicted an unprecedented political upheaval. Other critics however, have focused on the precipitous drop in oil prices since June 2014 to argue that the kingdom is in serious economic trouble. Indeed, the decline in oil prices from about $115 to below $45 today seems the more daunting challenge. Of course, oil does play a central role in the functioning of the Saudi state. Riyadh, however, is no stranger to oil crises. The lessons Saudi Arabia learned from previous crashes have taught it to curtail public spending and maintain access to large foreign currency reserves when in trouble. As a result, Saudi Arabia is better positioned than ever to weather the effects of flagging oil prices. Although it will still face difficult decisions in the months ahead, the challenges alone are not enough to bring about the state’s demise”.

The article notes the extent of the importance of oil for the country, “Oil accounts for 90 percent of Saudi Arabia’s exports and 40 percent of its GDP. More importantly, it constitutes almost 80 percent of the Saudi government’s revenues. With the bulk of its wealth coming from the sale of its natural resources rather than taxation, its citizens have had relatively limited involvement in the political decision-making process.  The Saudi economy—like many of those across the Middle East—combines free market policies underlying its banking, healthcare, manufacturing, construction and telecommunications sectors with heavy state involvement in regulation, planning, and development funding. The Saudi public sector remains immense; recent reports, including a poll conducted by Gallup, estimates that the Saudi government employs as many as eight out of every ten citizens. The government has pumped billions of dollars into education, housing, and healthcare in the hopes of preparing its young population to compete in a global economy”.

The writer adds that “During past oil slumps, Saudi Arabia has resorted to a combination of spending cuts and revenues boosts by instituting hiring freezes, delaying the implementation of some industrial projects, raising the fees associated with licenses and permits, and even increasing the price of its heavily subsidized gasoline. Some of these same measures are under consideration once again. The Wall Street Journal has reported that Saudi Arabia might follow the example of other Gulf Cooperation Council states and reduce energy subsidies, which comprise up to 20 percent of the government’s budget, although officials have said that such a measure is not yet necessary. Saudi officials have also made assurances that the government has adequate reserves of approximately $650 billion. Nevertheless, in July, Saudi Arabia issued public bonds for the first time since 2007 and issued another $5.3 billion worth in late November. For its part, the International Monetary Fund has warned that if Saudi Arabia continues to tap into its reserves at the current pace in order to meet its budget shortfall—predicted to be in excess of $130 billion—it will deplete the funds within five years”.

Correctly the piece argues that “the Saudis are deliberately trying to force out high-cost producers, especially U.S. shale producers, by forcing global prices to plummet due to an oil surplus. Russian President Vladimir Putin himself has even suggested that the Saudis are using oil as an economic weapon against Russia and Iran for their support of Syrian President Bashar al-Assad, forcing prices downward as financial punishment for the two other prominent oil-producing nations Tempting as it is for some to believe the latter of these narratives, there is little evidence to support this contention, and a number of prominent energy analysts have attributed the current slump to simple market fundamentals”.

Interestingly he mentions that “A recent report suggested that the Saudi government is on the verge of embarking on major reforms including substantial budgetary cuts, a redoubled effort to reduce the size of public sector employment, and an increase in the state’s private sector. It is unusual for Saudi officials to reveal reform plans in such a manner, but they are not nearly as averse to political, social, and economic reforms as many assume. There is little doubt that they would prefer to embark on gradual reforms on their own terms and at their own pace, but the state of the global oil market will make that exceedingly difficult. The Saudi government will continue its effort to diversify its economy in order to reduce its dependence on oil profits, and has directed its efforts toward crafting a knowledge-based economy in the years ahead through investments in education. It will also likely continue to privatize some government-owned corporations, including in the telecommunications, healthcare, and education sectors. Likewise, efforts to reduce the number of non-Saudis working in the private sector—estimated to be eight million—have paid some dividends, showing some significant improvements in the number of Saudi women in the workforce. To curtail government spending, the Saudis have even taken some measures to slowly open their stock market to foreign investors. Even tourism is now viewed as a sector with significant potential to generate employment. In this new oil economy, the Saudis are considering all their options, and nothing is off the table”.

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