Government tightens belt, reviews projects valued at about $69 billion
The Kingdom of Saudi Arabia, the world’s biggest oil exporter, is in the midst of an economic overhaul and is looking to cancel more than $20 billion of projects and slash ministry budgets by 25%, as reported by Bloomberg on September 6th, 2016. These measures are aimed at shrinking the highest budget deficit among the world’s 20 biggest economies. In 2015, Saudi Arabia saw its budget deficit widen to nearly $100 billion, or 15% of its GDP, following a fall in global oil prices by more than 50% since June 2015. The government has since tightened its belt, and is appraising thousands of projects valued at about 260 billion riyals ($69 billion), seeking to cancel at least a third of them.
The kingdom is not counting on a major recovery of oil prices any time soon, but is instead preparing for a multi-year period of a slump in oil prices. As part of its austerity measures, Saudi Arabia is also curtailing fuel and utility subsidies as well as cutting billions of dollars in spending. Additionally, the government is also looking to merge some government ministries and eliminating others, which would impact the budget for several years. The International Monetary Fund expects the Kingdom’s budgetary deficit to drop to below 10% of GDP in 2017.
In Q1 FY16, Saudi Arabia’s economy grew 1.5%, the slowest since Q1 FY13, and below forecasts of 1.8%. While the oil sector grew 5.1% during the quarter, the non-oil sector shrank 0.7%, its worst performance in about five years. Within the non-oil sector, the private sector grew just 0.2%, while the government sector shrank 2.6%, according to official data.
New economic strategy
Saudi Arabia’s heavy dependence on oil, compounded by the sharp drops in oil prices has caused state revenues to drop substantially and growth prospects to weaken. As part of its new economic reforms, the kingdom is looking to diversify into sectors that do not rely on the country’s oil resources. Hence, weaning away its dependence on the oil sector and diversifying into other sectors are seen as the short-term fixes to tackle the current crisis within the kingdom. Additionally, Saudi Arabia is looking to attract international investors and gain technical expertise aimed at creating jobs for its growing population and to achieve sustained growth over the long-term.
As part of this new economic strategy, the Vision 2030 plan, announced by Deputy Crown Prince Mohammed bin Salman, the son of King Salman, aims to reduce dependence on oil production and achieving diversification as part of its long-term growth strategy. This plan includes selling a stake in oil giant Aramco and creating the world’s biggest sovereign wealth fund. Saudi Arabia’s economy, which is predominantly fueled by oil revenue, is faced with a crisis owing to stunted public sector growth, leading economists to predict a whopping $87-billion deficit in 2016.
Foreign investments and expertise
In May 2016, General Electric (NYSE: GE) announced that it has committed to investments worth over $1.4 billion in Saudi Arabia to support the kingdom’s Vision 2030 plan in strategic sectors such as water, aviation, and digital. Saudi Arabia is also looking to enter into joint ventures to boost small and medium-sized businesses, drive exports, improve economic competitiveness in the near term, and provide employment opportunities outside of the public sector.
OPEC’s call to cut output
Saudi Arabia’s oil-driven economy is expected to face a bearish sentiment for crude for the remainder of 2016 since the fuel market is currently faced with an oversupply due to low demand, swelling U.S. inventories, increased output from Nigeria, and heightened U.S. drilling activity. Hence, in August 2016, the Organization of the Petroleum Exporting Countries (OPEC) had called for freezing output aimed at market rebalancing, where supply has consistently outpaced demand. While the current cycle of low oil prices is expected to end by late-2017, economists believe that a market re-balancing would take place in 2018, when crude oil prices are expected to breach the $55 level.