The double blow of depressed oil prices and the COVID-19 pandemic is placing unique pressure on the Saudi economy. COVID-19 has further devalued oil and wreaked havoc on the non-energy sectors Saudi Arabia is trying to develop in the name of diversification. Current dynamics are testing the sustainability of the rentier state and prompting the introduction of unprecedented austerity measures. Saudi Vision 2030, the centerpiece of Crown Prince Mohammed bin Salman’s mission to transform the kingdom, is largely on hold and may never return to its original form. Yet, this crisis may also present an opportunity for a new frame of thinking and modifications to the Saudi economy that may be beneficial in the long run. The government will have to make critical decisions, some that could create a leaner and more efficient economy as Saudi Arabia emerges from these conditions. While those decisions would have been arduous to implement under normal circumstances, they are necessary today.
In March, Saudi net foreign assets fell by almost $27 billion to $464 billion, the lowest level in 19 years. The Ministry of Finance increased its debt ceiling from 30 percent of GDP to 50 percent. Saudi Aramco, the world’s largest public company, reported a 25 percent drop in net income in the first quarter of 2020. The IMF projects a breakeven oil price of $76 USD per barrel for Saudi Arabia, more than double the current price. Public health concerns are also threatening the viability of welcoming millions of pilgrims to Mecca and Medina in July for the Hajj. Religious tourism typically makes up about 20 percent of the country’s non-oil GDP.
In response to the dire budgetary conditions, the government has taken several steps to rein in spending and increase the burden on consumers. Recent announcements include the tripling of the value-added tax and the termination of a cost-of-living allowance for public sector employees. The government intends to reduce spending by over $26 billion and a committee has been convened to review the salaries of employees and contractors outside the standard civil service system. Such measures demonstrate the gravity of the situation, and that the benefits Saudi citizens have become accustomed to are not guaranteed to remain in place.
As austerity measures take effect, adjustments are also being made to the enormously expensive Saudi Vision 2030. The development plan consists of a very ambitious set of goals, even during more normal circumstances. Today, projects associated with the Vision across a wide range of sectors such as infrastructure, tourism, and entertainment are at risk of being delayed or shelved altogether. The Crown Prince, who only entered the spotlight a few years ago and is now the face of the kingdom, has bet big on the Vision’s success. Yet present economic realities make expensive projects like these difficult to implement. One of the Vision’s most high-profile objectives, the construction of a $500 billion mega-city called NEOM that is estimated to be 33 times the size of New York City, may no longer be feasible (and that may not be a bad thing).
Like its fellow Gulf Cooperation Council (GCC) members, the Saudis are working to decrease reliance on energy income and bolster the private sector. The IMF estimates that oil represents over 40 percent of the Saudi GDP and almost 80 percent of exports. In a region historically characterized by bloated public sectors, it is critical to nurture a competitive and innovative business climate. Saudi Arabia has made progress in that area. In the World Bank’s Doing Business 2020 report, which focuses on productive business regulations, Saudi Arabia is cited as one of the most improved countries. In 2019, foreign companies, including defense industry titan General Dynamics, complained about not getting paid on time by the Saudi government. During the pandemic, the government may have even more difficulty paying contractors what they are owed, leading to further reputational damage. As is the case elsewhere, COVID-19 is clobbering the private sector and forcing many small and medium-size enterprises to shut down, or depend on government aid. Saudi Arabia plans to diversify and build out the private sector by developing special economic zones, increasing FDI, and privatizing state-owned entities. To a large degree, they are going to have to wait until the country’s balance sheet is more level.
With the myriad challenges facing the Saudi economy, a successful recovery and evolution will require several key outcomes. The government will need to be disciplined, willing to deviate from long-established norms, and able to make decisions that will be painful in the short-term. A reform-driven period also provides the opportunity for the Saudis to be decisive and reset elements of the economy that have lagged. The economy can re-emerge with a renewed dedication to the private sector's potential and new opportunities for youth employment. During the pandemic, the kingdom can capitalize on recent progress in the digital space, through mobile apps, government service portals, and e-commerce.
This is also a chance to reshape Saudi Vision 2030, and mold that grand plan into a more realistic, trimmed-down form. The aspiration to construct a mega-city or make Saudi Arabia the hottest tourist destination in the Middle East is not inherently problematic, but given today’s budgetary crisis, this can be a moment for reflecting on how to balance meeting pressing needs and continuing to march ahead with Vision 2030. Furthermore, COVID-19 is prompting new attitudes worldwide about the presence of foreign workers. Like the GCC as a whole, Saudi Arabia has depended on millions of foreign workers over the years to do both skilled and unskilled jobs. Because the pandemic has rendered much of the workforce inactive, this is an ideal time to recalibrate foreign workers' ratio to Saudi nationals and increase the ‘Saudization’ of the economy.
The Saudi retail sector, for instance, employed 1.5 million people in 2018. Only 300,000 of those workers were Saudis. Millions of Saudis, especially young ones, will need jobs on the other side of this crisis. In a sense, the current economic pause could offer a reset, paving the way for Saudis to take jobs in sectors where they are underrepresented. That transition would force large numbers of foreign workers to seek employment elsewhere and decrease remittance outflows from the kingdom, which were the third largest in the world in 2018 at around $34 billion USD. However, it would also help address the issue of Saudi unemployment and build political goodwill with the local population.
Meanwhile, the Saudi sovereign wealth fund PIF (Public Investment Fund) has been on a spending spree. Unlike many countries in the Arab world, Saudi Arabia has the resources to spend big and take advantage of good deals in the marketplace. In recent months, PIF increased its U.S. stock holdings from around $2.2 billion in December to $9.8 billion at the end of March. The fund is also in the process of trying to purchase the English soccer team Newcastle United for over $300 million. Although the Saudi economy has been battered, the kingdom still has deep pockets and the ability to be opportunistic during this global recession.
Finally, this crisis may result in increased cooperation between Saudi Arabia and the rest of the GCC, a body that has had limited efficacy. Under the narrative of unprecedented challenges, this would be an ideal time to resolve the Saudi and Emirati-led blockade of Qatar, which has harmed all of the GCC politically and economically. A unified GCC bloc will be far better prepared for managing COVID-19 and low energy prices looking forward.
The Saudi economy can emerge from this period of hardship with refined priorities, a more dynamic private sector, and new jobs for locals. Such a transformation will take time and a rigorous approach, especially since it does not appear that COVID-19 will be solved in a matter of months. But this moment could be a wake-up call that drives important reforms in the Saudi economy and better prepares it for the future.
Bayly Winder is an incoming MBA student at Oxford University. Follow him on Twitter @BaylyWinder.
