Biggest challenge is governance
by Meghnad Desai
Saudi Arabia is an unusual economy with an unusually important and sensitive role in the international economy. It provides oil, funding and geopolitical backing for many world governments. For the future, nothing is certain, except there will be less money around to salve wounds than there used to be.
The International Monetary Fund has warned that Saudi Arabia could deplete its financial reserves within five years unless it increases efforts to balance the budget. Yet Riyadh’s main challenges are political, not economic. Iran as a major Shia country is a principal adversary, and as Iran recovers after the nuclear treaty with the US, its growing power will worry the Saudis. There are rumours of opposition in the royal family to the policies of King Salman, 79, who took over in January after the death of King Abdullah. We should all watch out: Saudi’s problems are the world’s problems.
The economy is based on a single commodity – oil, which accounts for 45% of GDP and 90% of exports. Since oil is state- or royal family-owned, the country effectively has the largest nationalised sector outside North Korea. Saudi extraction costs are very low, so this is an economy living on rental income from a resource, rather than through agriculture or manufacturing.
ʻMono-cropʼ status normally denotes poverty. But Saudi Arabia is prosperous and a member of the G20, with a GDP of $650bn ($1.67tn based on purchasing-power parity) and per capita income of about $21,000 ($53,000 based on PPP). For the 21m native-born subjects who are generously looked after, Saudi Arabia has the hallmarks of a well-heeled welfare state. The 8m immigrants do most of the menial work.
Apart from oil, the economy relies greatly on construction and tourism, in view of its position as home to centres of Islamic pilgrim-age in Mecca and Medina. The economy is hypersensitive to oil price fluctuations. After the lean 1990s, the price boom in the first decade of of the 21st century gave an economic boost. Now that the price has halved, the Saudi economy has attracted concern from the IMF, which has pointed to the massive increase in Riyadh’s budget deficit to 20% of GDP this year. There is no doubt this is affordable: the debt to GDP ratio is absurdly small at 1.6%, rising to 6.7 % this year and 17.3% in 2016. While this is rapid, Saudi Arabia is hardly Greece.
Oil price falls
The oil price is the crucial number. The fall reflects the Chinese slowdown, a long period of low growth in Organisation for Economic Co-operation and Development countries, high inventories and a continued supply glut. The Saudi decision to maintain oil production seemed calculated both to damage Iran (and possibly Russia, too), as well as to price US shale oil out of the market. So far, the strategy has not worked. Saudi Arabia is stuck with a low oil price that few expect to return to the giddy heights of $100. The price in the next 12–24 months is projected to remain around the $50–60 level.
Saudi Arabia has enough assets to be able to attract buyers for its sovereign bonds. Yet it has a restless young population not used to working too hard and preferring to enjoy life; for them, a shrinking per capita income does not bode well.
The shortage of funds may have an influence, too, on Saudi Arabia’s ability to engage air forces in the Yemen civil war, as well as to fund Sunni armies fighting on various fronts in Iraq and Syria. The region is caught in a series of many-pronged conflicts involving the Islamic State, with Russia, Saudi Arabia and Iran all siding with diverse proxy forces.
Core weakness: governance
A deepening or widening of any of these conflicts could expose Saudi Arabia’s principal weakness: its governance. The succession passed amicably in January following Abdullah’s death after 10 years on the throne. Salman is said to be from a less senior branch among the queens of the old King Ibn Saud, whose many sons and grandsons run into the hundreds. The further line of succession has been deter-mined, since Mohammad bin Nayef and Prince Mohammad bin Salman (the king's son) have been named as crown prince and deputy re-spectively. But economic fragility may yet have political repercussions.
Various factions of young princes are rumoured to be impatient for more radical reform in a country that affords very little freedom for its people. It is not clear how serious these rumours are, but the king’s fragile health is not a good omen. The most ominous possibility would be an upheaval of the sort that brought the powerful and oil-rich Shah of Iranʼs kingdom to an end in 1979.
Saudi Arabia has successfully suppressed any popular movement of the sort that brought down the Shah, but the House of Saud faces some fraught years ahead. The world would have greater faith in Saudi stability if the oil price recovers beyond the $60 level.
■ Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Political Science. Back