Leading economists are forecasting that the economic slump in Saudi Arabia, caused in large part by the dramatic collapse of oil prices, is set to continue with little optimism that an upturn is in sight.
London based Capital Economics released data on the 29th of February noting that GDP growth “will slow sharply from 3.4% in 2015 to 1.5% this year.” With HSBC’s chief Middle East economist forecasting that the Saudi budget deficit will soar to almost $90 billion US in 2016 and low oil prices set to stay in place the efforts sketched out by Deputy Crown Prince Mohammed bin Salman earlier in the year to kick start economic reforms take on added urgency.
In his January interview with the Economist the Deputy Crown Prince alluded to an aggressive privatization programme. When asked what he would privatise to raise revenues he replied “health care, the educational sector, some military sectors such as military industries and some state owned companies.” Most surprising, given its status within the kingdom, the prince seemed ready to put shares in Saudi Aramco on the market: “Personally I’m enthusiastic about this step. I believe it is in the interest of the Saudi market and it is in the interest of Aramco.”
Experts have estimated the value of Saudi Aramco as being anywhere from $1 trillion to $10 trillion so putting even 5% of the company up for sale would at the lowest estimate raise an impressive $50 billion.
Evening without putting Aramco on the market, Jason Tuvey of Capital Economics notes that privatisation in the non-energy sectors such as hospitals, roads and airports could raise substantial revenues: “ A plausible estimate would be that the authorities could secure additional revenues of between $75 billion and $100 billion (12-15% of GDP) spread out over the next five years.”
So why the gloomy forecasts? In part it has to do with the hydrocarbons market. At the end of last year, with the price of oil plunging off a cliff, the kingdom had piled up a record deficit of $98 billion. Nonetheless, the oil minister Ali Al Naimi has ruled out cutting oil production and went so far as to say in late February that the kingdom could handle $20 bbl. That means only one thing: prices will stay low, adding to the rapidly growing Saudi deficit. Additionally the non-oil sector is slowing as subsidy cuts on energy and water begin to take hold. Inflation has nearly doubled to over 4% and consumer spending is slipping as households have less disposable income. Further cuts to government spending are in the pipeline – last year the budget was slashed by 14.5% and the plan is to do the same again in 2016. And with government being by far the biggest spender and the biggest employer that is more bad news for the economy in the short to medium turn
Added to that, the bold economic reforms that the deputy crown prince is calling for sail into a stiff wind of resistance from entrenched elites who have benefitted handsomely over the years from a laissez faire, let the ruling family takes its full share attitude.
One crucial area where a significant change could benefit both citizens and the economy is the construction sector, specifically building affordable houses for the country’s young and fast growing population. Here there is encouraging news with the announcement on 29 February that the government has dramatically loosened its mortgage lending rules by slashing the down payment from a 30% requirement to 15%.
That will help but the government must now work with similar urgency to free up so-called white lands, prime urban real estate that has sat vacant for decades. Getting that land into the hands of developers committed to meeting the needs of the affordable housing market is essential. Without that happening the housing sector, which has great growth potential and many positive upsides, will never get out of first gear.
It is worth noting that, as head of the powerful Council of Economic and Development Affairs Mohammed bin Salman placed a white lands tax right at the top of the council’s agenda. That was back in March 2015. Now nearly a year on, the tax has not yet come into force with debate over the mechanism pushing back the implementation date. Clearly, it is facing stiff resistance from wealthy landowners both inside and outside the ruling family.
But that sort of resistance and the traditional inertia built into the Saudi economy will have to be overcome if what is still a mild economic headache is not to turn into a full blown migraine.