World Economy

Saudi Arabia Diversifying Economy

Saudi Arabia Diversifying EconomySaudi Arabia Diversifying Economy

Although Saudi Arabia has substantial financial reserves to withstand low oil prices over the next few years, recent government spending has intensified the need for longer term fiscal, environmental and resource sustainability in the country, according to a new ICAEW (The Institute of Chartered Accountants in England and Wales report.

The report—Economic Insight: Middle East Q2 2015—is produced by Cebr, ICAEW’s partner and economic forecaster.

Commissioned by ICAEW, the report provides a snapshot of the region’s economic performance. The report undertakes a quarterly review of the Middle East, focusing on the (Persian) Gulf Cooperation Council ((P)GCC) member countries (Saudi Arabia, UAE, Bahrain, Oman, Qatar and Kuwait), as well as Egypt, Iran, Iraq, Jordan and Lebanon.

Lower oil prices will have a greater impact on Saudi Arabia’s economic growth over the medium rather than the short term.

As a result of the government’s decision to allocate additional funding to social activities like education, the break-even crude oil price has surged from just under $75 in 2009 to $90 in 2015.

While the finance ministry plans to address this by curbing public sector salaries and allowances, which comprise roughly half of the budget, a longer-term strategy for generating growth among non-oil sectors is now crucial for the country.

Fortunately, Saudi Arabia has been investing significantly for many years in education, agriculture, and banking and finance to limit its oil dependence.

Recently, the country announced that from mid-June 2015 foreigners will have direct access to its stock market. The opening of the $570 billion-plus bourse is a substantial leap forward for regional equity markets and is likely to draw a number of investors that see potential in the country’s proliferation of longstanding companies and the growing, increasingly affluent, population.

(P)GCC economies could take advantage of lower oil prices to justify fuel subsidy reductions since diminishing government revenue will create a more pressing need to limit spending.

Also, if fuel subsidies are removed during a period of subdued oil prices, the inflationary impact will be felt less sharply by the population.