The oil price was near its lowest in more than a decade, cash reserves were being depleted, emerging markets were in turmoil and Saudi Arabia was beginning to panic.
“It was a very scary moment,” said Khalid Alsweilem, former head of investment at the Saudi Arabian Monetary Agency, the country’s central bank. “And luckily at that point, oil prices started going up. Not by design, by good luck,” Bloomberg reported.
That was in 1998, and now Saudi Arabia’s fortunes threaten to turn again. This time, luck might not be enough as the government tries to protect the wealth of a nation whose economy has swelled by five times since then.
Economists are predicting a budget deficit of as much as 20% of gross domestic product and the International Monetary Fund forecasts a first Saudi current-account deficit in more than a decade. Reserves at the central bank tumbled 10% from a year ago, or by more than $70 billion.
Devaluation Near?
As a result, bets on the devaluation of the riyal are surging. The Tadawul All Share Index lost 18% in the past three months and dragged stocks down across the Persian Gulf Arab region. The benchmark’s moving averages made a so-called death cross on Aug. 18, a sign to some investors that more losses are ahead.
With oil prices down by more than half over the past 12 months to below $50, Saudi Arabia faces many of the same financial problems it did in 1998.
The difference is the sheer cost of maintaining the state as an employment machine and guarantor of the riches that Saudis have become accustomed to since the last squeeze. Subsidized gasoline costs 16 cents per liter and while there’s the religious levy called zakat, there is no personal income tax in the nation of 30 million people.
Fuel subsidies alone will cost Saudi Arabia as much as 195 billion riyals ($52 billion) this year, or 8% of GDP.
Taking Action
That’s not to suggest Saudi Arabia is headed for the kind of spending cuts and tax increases more familiar to austerity-hit Europeans. The government, for instance, could first freeze the expansion of two mosques in Mecca or tax wealthy landowners, Jamal Khashoggi, a former media adviser to Saudi Prince Turki al-Faisal, said by phone from Riyadh.
“There’s a long list of things that Saudi officials can do before touching the livelihood of ordinary Saudis,” said Khashoggi. “Yes, it’s a difficult time and maybe it could have been much better if we did what we’re doing today a couple of years ago when the price of oil was in the $100s.”
During those good times, King Abdullah, who ruled from 2005 until his death in January, increased social spending as the Arab Spring uprisings toppled leaders elsewhere.
The country has declined to cut production and lift prices over the past year to gain market share from the shale industry in the US and other producers with higher expenses, even if that’s come at a cost to its finances. Saudi Arabia still has $664 billion of net foreign assets, equal to almost 90% of the economy, and little debt.
