The plunge in oil prices had affected the largest GCC country to the extent that the authorities decided to reduce its dependence on oil economy. GDP growth suffered a severe setback in 2016 falling to 1.7% y/y compared to 4.1% in the previous year.[i] Weak consumer demand coupled with reduced capital spending by the Government contributed to sluggish economic growth. The industrial production growth also declined to 3.2% by end-2016 from 6.3% a year earlier.[ii] Brent crude prices declined to $45 bbl in 2016 from $54 bbl in 2015. This in turn has affected the Government revenues, thereby impairing fiscal situation.
Fiscal consolidation measures which began in 2015H2 continued in 2016, in the form of increase in domestic fuel and utility prices, reduction in allocation for health, education and municipalities, freeze in public servants’ basic salaries and curtailment of their benefits, which also acted as a drag on non-oil sector growth. However, despite these efforts fiscal deficit continued to deteriorate. Government deficit as a percentage of GDP increased to 12.8% in 2016 from 2.3% in 2014, though a moderate improvement over 14.8% in 2015.[iii] However, increase in VAT planned for next year might provide some relief. The agreement among OPEC and non-OPEC members to increase production cuts for another nine months to March 2018 and the new alliance between the two major oil exporters, Russia and Saudi Arabia to withhold output, and pledge of Saudi to curb exports are expected to provide support to oil prices.[iv] However, it is yet to be seen how much impact it is going to have on crude prices. Oil price has averaged to $52.2 bbl so far this year and is now hovering around $50 bbl.
Even the external balance has been deteriorating since 2011 owing to downturn in oil prices. In 2016, the country registered a current account deficit amounting to 4% of GDP as against a surplus of 11.35 in 2014.[v] Meanwhile, the trade surplus also shrank significantly to $43.4 billion from $168.6 billion in 2014.[vi] The external balance has improved compared to 2015. However, with oil prices expected to remain range bound ($50-$60 bbl) in the short to medium run, it is likely to remain under pressure going forward. Meanwhile, financial outflows continued to increase thereby putting pressure on the Saudi Riyal (SAR) in the forward market. Therefore, Saudi authorities had to intervene in the foreign exchange market in order to maintain the fixed dollar peg at SAR 3.75 per USD. There have been suggestions for a change in the dollar peg for sometime by the authorities. However, the fear that such a change could be destabilizing for the economy and that coordination with other GCC states would be required have prevented this.
Against this backdrop of economic slowdown, in mid-2016 Saudi Arabia came up with a roadmap for economic development and objectives to be achieved for the next 15 years to eliminate its dependence on oil in the form of Vision 2030.[vii] With this came the $72 billion National Transformation Program (NTP) 2020, which was launched to build the institutional capacities and capabilities required to achieve its goals of Vision 2030. The main objectives are to increase the share of private sector in the economy from current 40% to 65%, strengthen partnership with the private sector, create jobs, reduce import dependence and usher an era of digital transformation.
The program aims to bring industry wide reforms encompassing health, education, transportation, pharmaceuticals, renewable, manufacturing, mining and tourism sectors. In order to expand the role of private sector in economic activity, the IPO of Kingdom’s oil company, Saudi Aramco which is expected to be done in 2018 is a major step.[viii] However, with oil forming around 70% of the Government revenues, the country has no major industry developed which is not related to oil (a consequence of Dutch disease). Thus, the vision of ending oil dependence by 2030 seems too ambitious.
On the socio-political front as well, the situation is not that rosy. Unemployment remains one of the greatest weaknesses of the economy and it has the potential to fuel increased militancy, particularly among the minority Shia population. In this respect, Qatif region in the Eastern Province, which has witnessed domestic terrorism since the 2011 Arab Spring protests, is particularly vulnerable. Regional uncertainties exist, with land borders with Iraq and Yemen and with Iran as a close neighbour. In order to reduce unemployment among Saudis, the Kingdom plans to tighten restrictions on foreign workers to pressure companies into hiring more Saudi citizens.[ix] The new policy could help the conservative Kingdom achieve one goal of economic reforms launched last year to ease joblessness among Saudis from the current 12.1% to 9% by 2020. Furthermore, the radical transformation to the economy in the form of shift in royal succession wherein King Salman declared his son, Prince Mohammed bin Salman as crown prince in place of his nephew Prince Mohammed bin Nayaf, is another unexpected move which has caused a lot of turmoil and uncertainty within the Kingdom.[x]
In addition to domestic strife, the conflict with Qatar is another issue and has raised alarm among the GCC countries. The relation between the GCC nations has been under strain after Saudi Arabia alongwith UAE, Bahrain and Egypt cut off ties with Qatar in June this year. Not only have the diplomatic ties been severed, but air, land and sea links have also been shut down. It is one of the gravest crisis that the Gulf countries are witnessing since their existence. Qatar has been criticized for supporting terrorism and also because of its increasing ties with Iran and Yemen. Thus the countries have emphasized that the decision has been taken over security and safety concerns of their respective nations. However, Qatar refutes all these allegations. Saudi Arabia has always been apprehensive about Qatar and the hack of Qatar’s official news agency only gave them an excuse to cut-off the country. Later, Saudi Arabia and its allies listed some demands from Qatar including shutting down a Turkish military facility in Qatar, stopping the finance of terrorist groups, breaking contact with opposition groups in Arab Gulf states and aligning its military and economic policies with other Gulf and Arab countries, among others in order to end this diplomatic crisis. However, the conflict does not seem to come to an end. It has reached an impasse and if prolonged the crisis can prove to be detrimental to the Gulf countries. Thus they should aim to resolve the issue through negotiations and mediation.[xi]
To conclude amidst this geo-political crisis, domestic unrest related to succession and other socio-economic issues, it is to be seen how the Kingdom is going to fare on its structural transformation and reduce its reliance on oil. It seems to be a real daunting task.
[i] Saudi Arabian Monetary Authority (SAMA), Yearly Statistics
[iv] Reuters, “OPEC, non-OPEC extend oil output cut by nine months to fight glut”, May 25, 2017
Also see Wall Street Journal, “Russia, Saudi Arabia Explore Expanding Oil Alliance to Middle East Troubles”, June 1, 2017
[v] SAMA op. cit.
[viii] Forbes, “The World’s Biggest IPO Is Coming: What You Should Know About Aramco”, February 25, 2017
[ix] Khaleeej Times, Saudi Arabia to tighten restriction on foreign workers: March 21, 2017 http://www.khaleejtimes.com/region/saudi-arabia/saudi-arabia-to-tighten-restriction-on-foreign-workers
[x]Independent, “Saudi Crown Prince forced from power by younger cousin over painkiller addiction”, July 20, 2017
[xi] The Guardian, “Gulf plunged into diplomatic crisis as countries cut ties with Qatar”, June 5, 2017
Photo credit: Creative Commons