January 1, 2016


Saudi Arabia's economic time bomb (Luay Al-Khatteeb, 12/31/15, Brookings)

The rapid depletion of Saudi's foreign exchange funds is rather alarming. During 2015, the Kingdom's central bank reserves have dropped from $732 billion to $623 billion in less than 12 months. Based on current levels of spending and deficit, and assuming budget priorities remain static, with oil market conditions to stay unchanged, and regional tensions do not escalate, their reserves give them a fiscal buffer of five years at best.

The 2014-2015 declines in oil prices differ from historic episodes. This time it's oversupply driven by unprecedented production levels from conventional and non-conventional producers. Advance technologies and unconventional sources of supply to the energy mix have made the competition fierce over market share. To make matters worse, Saudi Arabia will have to compete with aggressive oil production plans projected by Iraq and Iran. This will undoubtedly glut the market with further oversupplies of 3 million barrel a day.  If this unsustainable financial decline continues at its present rate, the dollar exchange rate to the riyal will be endangered and the government will not be able to keep the peg. This may have serious ramifications on the U.S. dollar if other Gulf Cooperation Council countries follow suit.

Annual subsidies on oil and gas are costing the Kingdom around $61 billion and nearly $10 billion for electricity and water. As a result of current fiscal reforms enacted by the government, they have now increased rates on natural gas to +66%, ethane +133%, and gasoline +50%. Although this could be seen as a massive increase in prices by local consumers, the increases remain relatively low compared to international markets. This slight increase in prices which is being replicated across the GCC, is seen more as an austerity package alongside increase in taxes than strictly adhering to the International Monetary Fund recommendations. The impact of such measures are yet to be clearly tested and assessed in terms of local acceptance but provided the local cost of goods and services remain stable, job creation for locals in the public sector increases and welfare benefits remain as they are, citizens of KSA are unlikely to put pressure on the Government.

As for defence spending, the 2016 budget has featured the largest single allocation in the budget at 213 billion riyals ($56.79 billion) to the military and security services, comprising more than 25 percent of the total budget. According to IHS, Saudi defence could reach as much as $62bn by 2020, in part due to KSA's military interventions in the region. It is worth noting Riyadh's defence budget had been rising by 19 per cent a year since the Arab uprisings of 2011 which clearly reflects the growing domestic and regional pressures felt by the authorities.

Furthermore, budgeted allocations may not necessarily include off balance sheet financial commitments allocated to countries that opted to join Saudi Arabia's military coalitions and campaigns in the Middle East.

The Ticking Time Bomb

Sharp decline in oil prices, cost of subsidies and military spending, including the war in Yemen and supporting rebels in Syria, are all factors that will continue impacting the Kingdom's financial position. However, the 'mother of all problems' facing the nation is not a growing budget deficit, regional terrorism and sectarian tensions but the growing and endemic youth unemployment that continues to endanger Saudi Arabia's national security. Saudi Arabia needs to increase public-private sector cooperation to absorb millions of unemployed youth and avoid rendering them to the abyss of terrorism or civil unrest.

Despite the Kingdom's 23 per cent budget allocation to education and training, SR 191.6 billion ($51 billion), Saudi Arabia's youth unemployment is now the biggest socio-economic challenge that is crippling if not seriously undermine the Government's hold on power.

Two-thirds of the Saudi population - of 30.8 million - are under the age of 30. According to official statistics, the unemployment rate for Saudis aged 15 to 24 is 30 percent. A published paper by the Woodrow Wilson International Center for Scholars in 2011 suggests that thirty-seven percent of all Saudis are 14-years-old or younger! Saudi Arabia needs to create at least 3 million new jobs by 2020.

The Saudi government will also need to release immense pent up social pressure by adopting genuine grass root policies adhering to democracy and human rights principles under international laws and conventions. It should not be forgotten that Government's accountability and protection should be truly expressed to the 10 million expat community living in the Kingdom including children born to Saudi mothers but foreign fathers. For example, children who are born to Saudi mothers despite being entitled to education at primary, secondary and undergraduate levels and have a right to work are not citizens with unqualified rights of residency or state pensions, unlike children born to Saudi fathers.

The End of History comes to everyone.

Posted by at January 1, 2016 11:02 AM