Economic Sustainability of Saudi Arabia: The key to a stable Middle East
The Kingdom’s Ministry of Finance budget announcement makes it abundantly clear: without a move towards a non-oil economy, market liberalization and increased private investment, the country should prepare to look at significantly tough times ahead.
Oil still comprises ~73% of the government’s revenues and depressed oil prices fueled by a supply glut — a strategic commitment to preserve market share — will result in gaping budget deficits in the near future. The primary reason this is taking a greater toll on the economy than expected is because of the Yemen imbroglio; and with a 25% portion of the budget reserved for military and security expenses, this will not change unless drastic measures are taken.
Internally, there’s nothing doing without fiscal reform. Measures such as reducing fuel subsidies alone, will not prove durable. Prudence needs to be exercised in taxation — indirect taxation is unlikely to be offset by gains in wages due to projected reduction in firm revenues — lowered disposable income typically results in an aggregated saving mindset. At the same time, taxing expat income without bridging local skills-education gaps is tantamount to driving away productivity gains. Absence of taxation is one of the key reasons they come and work in the region, in the first place.
Human capital, is definitely not the area to direct funds away from, in the coming years. As the demographic mix is very youthful, with about 37% under the age of 14, we are looking at 3 million more Saudi youth, wanting to enter the workforce. It’s encouraging to see that 23% of the budget has been committed to education. What is more important, is to ensure that the private sector is presented with trade and investment friendly ecosystem, creating jobs for locals, who in turn, have the kind of skills demanded by the job market.
Externally, Saudi Arabia, like other OPEC members, continues to discover that it’s assumptions regarding break-even oil prices as well as estimates for member (and non-member) reserves have not necessarily been correct. Consequently, where, the Kingdom had anticipated decisive clout at the negotiation table by now, the cartel is yet to reach an accord.
Fact remains that the world is still predominantly fossil fuel driven. If nothing changes, the riyal’s peg to the dollar is forecast to be undone in 2016; and if other GCC economies follow suit, the dollar will plunge. Capital markets have been resilient in the face of a weak renminbi and emerging market sluggishness but a weakening dollar is something no one wants.
When interests/economies of multiple countries will get impacted, it would take more than y-o-y increase in energy demand — some ominous geopolitical intervention — to make prices go up again and that is what the world needs to be wary of.
The Kingdom has shown a commitment to dynamism with a move to younger, more vibrant leadership, stressing meritocracy over kinship and involving women in the electoral process. We have to continue to hope that the vision for economic diversification is coupled with fast execution and accountability at all levels.
Proactive leadership that implements structural reforms and enables a more market-led economy is not just the Kingdom’s need, it’s the world’s best hope for a stable Middle East.
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*Update: After this post was published, on Friday, Saudi ARAMCO has confirmed that it is studying options to allow broader participation in its equity via a listing on capital markets. This came after Prince Mohammed bin Salman, expressed an interest in exploring the option during an interview with the Economist.
