Oct 14th 2015
MONEY is the glue that holds Saudi Arabia together. To maintain a loyal citizenry and counter radicalism, the kingdom’s rulers pamper their subjects with lavish benefits and cushy government jobs. In times of uncertainty, such as during the Arab spring, workers are handed pay rises and bonuses. The last big payout, after the coronation of King Salman in February, cost more than many governments spend in a year.
Such largesse, along with wars in Yemen and Syria and aid to states such as Egypt, has swelled public spending. Oil-rich Saudi Arabia is used to big bills. But for the past year the kingdom has aimed to keep the price of oil low by increasing production in an effort to undermine rivals and gain market share. As the price has collapsed, so too has government revenue, some 90% of which comes from the sticky stuff. The result is a budget deficit that is expected to exceed 20% of GDP this year.
There are now creeping signs of parsimony in the kingdom. Since July Saudi Arabia has borrowed some $15 billion from its citizens through local bonds, its first issuance of debt since 2007. While more borrowing is expected, the government is also “working on cutting unnecessary expenses”, says Ibrahim al-Assaf, the finance minister. Leaked memos hint at urgency. One dated September 28th, purportedly from King Salman to Mr Assaf, instructs ministries to stop new projects and cease buying cars, furniture and equipment. Another, from the ministry of finance, suggests they will stop payments in mid-November, six weeks earlier than usual.
The government has not confirmed the authenticity of the documents, but analysts think they reflect the royals’ concerns. The trajectory of Saudi finances is alarming. Government spending has quadrupled since 2003, raising the break-even price for oil—at which the government can balance its books—to over $100 per barrel. With the actual price sitting at around $50 per barrel, big deficits are expected well into the future. The shortfall “is too large to pretend that it’s business as usual”, says Simon Williams of HSBC, a bank.
The kingdom’s wealth gives it some capacity to absorb the fiscal shock. In the past year it has burned through over $80 billion of its foreign reserves, but it still has over $650 billion left. Public debt, which was around 100% of GDP in 1999, is now a paltry 2%. “It has plenty in its armory to withstand the situation,” says Jason Tuvey of Capital Economics, a research firm.
Drastic measures are therefore unlikely. Analysts do not expect Saudi Arabia to start taxing individuals, although the Gulf Co-operation Council, of which it is a member, is mulling a region-wide value-added tax. Nor is it expected to relax fuel subsidies, as other Gulf states have, or cut the public payroll.
During the oil glut of the 1980s, Saudi Arabia slashed capital spending, while leaving sensitive handouts largely untouched. Although the IMF has advised the opposite approach—maintaining capital spending and cutting handouts—the kingdom looks set for a repeat. It is said to be reviewing plans for new infrastructure and may delay or scale back some projects. It has already trimmed plans to build 11 new football stadiums. Next year’s budget, due in December, will show if the government has really turned thrifty.
Fixing the economy will take more than counting pennies, though. The government no longer creates enough public jobs for new workers, so more are pushed into the private sector. But these “Saudisation” efforts, such as setting quotas for Saudi employees in firms, have made little progress. Expats still hold most private-sector jobs, which often demand more and pay less than government work. After a crackdown on illegal foreign workers in 2013, Saudis did not want many of the unskilled positions left open. Companies, meanwhile, complain of too few qualified workers because the schools teach mostly religion.
For over 40 years the government has tried to boost the private sector and diversify the economy. But while the non-oil sector has grown, diversification is “a bit of a mirage”, says Mr Tuvey. Much of the growth has occurred in industries that depend on oil (eg, petrochemicals), rely on cheap energy or are supported by the government’s oil-fuelled spending. Oil still accounts for an overwhelming share of the country’s export earnings and nearly half of GDP. The pain of lower prices will be felt widely until adjustments are made.