“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel” – Rashid bin Saeed al Maktoum, Prime Minister of the United Arab Emirates, from 1958 to 1990.
In Saudi Arabia, where development only occurred from 1980, where oil underlies almost every facet of the economy, and where there are strained diplomatic relations with many other countries, it would be almost intuitive to suggest that the country would have a plethora of economic problems. Strangely, however, till now, that hasn’t been the case. Although the aforementioned quote was intended for Dubai in the 20th century, it is indeed far more applicable today to Saudi Arabia than to Dubai, which has diversified with relative success (although it, too, has its own problems). To the mirth of much of the Western world, Saudi Arabia, along with a number of other Gulf nations, is introducing an extra value added tax (VAT) to add a much-needed newfound revenue stream. This is one of the many signs that the country’s rulers are feeling the pinch, from the continued downward path that oil has taken in recent months. But what exactly is wrong with their economy?
Many of the problems which Saudi Arabia has have been predicated on its over reliance on oil for much of its economy. With the petroleum sector accounting for around 80% of budget revenues, 45% of GDP, and 90% of export earnings, it is clear that the Saudis are heavily overexposed to this volatile sector. Despite numerous attempts to diversify, including opening up a Saudi stock exchange, the success of these attempts have been minimal at best, and Saudi Arabia is still a hugely oil reliant nation. Despite being overshadowed while oil was reaching new heights, the problem with this, as shown today with the falling oil price, is that when oil falls, so does Saudi Arabia. In 2015, the Kingdom’s fiscal breakeven price was $104.40, more than double what the oil price is now. To combat this drop in prices, they needed to utilise some of their substantial foreign exchange reserves, which dropped to $602,032 million in January 2016. Although these are still the fourth highest in the world today, they continue to drop, and given the low level which oil prices should continue to see with Iran’s entry into the market, the drop shows no sign of stopping. Incredible for a country that had one of the world’s strongest economies just a few years ago.
Increasing social tensions in the Kingdom, in amalgamation with falling oil prices, have also discouraged foreign investment and have led to substantially increased capital outflows. As a result of the falling oil price, 46 large projects have been cancelled by major oil and gas companies, leading to a loss of around $200 billion in revenue for the Saudi government. Since the Arab Spring, the behaviour of the Saudi government had resulted in net capital outflows reaching around 8% of GDP a year. The recent turmoil in the Middle East, of which Saudi Arabia has been part of, has led to global outrage, specifically from Tehran. This was simply the catalyst for even more messy relations between Saudi Arabia and Iran, culminating in the severing of diplomatic relations between the two Muslim countries. Although it has yet to be seen just how badly foreign capital outflows were affected, reports already suggest that they may be higher than ever before. In this regard, the Kingdom’s rival, Qatar, has been far more wily, not cutting off relations even despite continued aggravation.
Given these two main tensions which the Kingdom has, they have two choices: the first of which is to continue their extensive spending, and increase budget deficits further, or to impose further austerity measures (which they already have) and risk the ire of its citizens. The nature of Saudi Arabian society is certainly different from that of the Western world, and this perhaps has only been endured by the citizens because of the lavish spending which is heaped upon them. When this is taken away, the house of cards may indeed fall, and, in light of this, the Saudis may find the first option more beneficial, however, this carries with it a whole host of new economic problems. As a result of these problems, Saudi Arabia find themselves in a great deal of economic quicksand, out of which there is really no favourable outcome. Oil prices don’t look like going back to $100 soon, and because of this, Saudi Arabia are finally feeling the brunt of not diversifying soon enough. The sustained downward spiral does not seem like going away anytime soon, and so the Saudis may have to start preparing themselves for, let’s say, a jolt back to reality.