World Economy

Saudi Arabia Losing Balance

Saudi Arabia Losing BalanceSaudi Arabia Losing Balance

Saudi Arabia's natural resources have made it wealthy and influential. But low oil prices, the war in Yemen and regional scuffles are whittling away its financial wiggle room.

The Kingdom Tower is under construction since December 2014. When finished, will soar up into the sky one whole kilometer (3,281 feet). If everything goes according to plans laid out by the House of Saud, it will be the tallest building in the world in early 2019, DW reported.

That is what the rulers of Saudi Arabia desire: noble, modern and superlative in world rankings of every sort. Yet, cracks are beginning to appear in the facade: In October, the International Monetary Fund predicted that the authoritarian kingdom will only be able to continue spending at its current pace for another five years–then its massive financial reserves will have dried up.

The trend has become increasingly precarious. The economic emergency can be tied to one single factor: the price of oil. For almost a year, the price of that natural resource has been slumbering around $40 to 50 a barrel. In fact, the price even fell below $40 a barrel–lower than it has been in six years–following a recent meeting of the Organization of the Petroleum Exporting Countries in Vienna. "Saudi Arabia uses a per barrel price between $80 and 100 for balanced budget calculations," says Sebastian Sons from the German Council on Foreign Relations.

Dissatisfaction Rising

Until now, the state has simply stuck its finger in the ground, turned the oil that shot out of it into cash, and then handed part of that cash to the people. The government has been massively subsidizing its subjects for decades: thus, keeping energy, gas and water prices artificially low. The government of Saudi Arabia does not levy taxes on income. "Saudi society has become wasteful," according to Middle East expert Sebastian Sons.

"Pushing through a sudden change of course is politically impossible," Sons said. Especially since one portion of society is becoming increasingly dissatisfied. Officially, unemployment in the kingdom is about 6%, but for those under 26, the situation is significantly worse. At the end of 2014; that is, under much better circumstances, some 30% of those under 26 years of age had no job.

Frustration is high, says Sons: "Every year some 100,000 young people graduate from university. But they cannot find jobs because they all want to work in the public sector."

Pragmatism or Ideology?

Beyond its southern border, the Saudis are fighting Houthi rebels in Yemen. Its most important proxy war is taking place in Syria. Yemen is not only a military disaster, it's a financial disaster as well. So far it is estimated that costs have been in the neighborhood of $50 billion in Yemen, and $20 billion in Syria. Syria expert and journalist Daniel Gerlach told the German public radio station Deutschlandfunk that Saudi Arabia had already invested $100 billion in the Syrian conflict.

Spending Cuts

Saudi government is expected to announce spending cuts and a drive to raise revenue from new sources as it lays out a strategy to cope with an era of cheap oil, people familiar with Saudi policy-making said. Reuters reported.

Markets in the world's top oil exporter are jittery because low crude prices have pushed state finances deep into deficit and so far the government has not revealed a detailed, comprehensive plan to stem the flow of red ink.

But in coming weeks, authorities will make their intentions clearer. The state budget for 2016 is expected to be released on or around December 21, official sources said.

In the following weeks, probably in January, the government is to reveal a multi-year economic plan that may include longer-term reforms such as cuts to energy subsidies and new taxes.

The government's deficit this year is expected to come in at about SR400-500 billion ($107-133 billion), around 20% of gross domestic product.

To ease market jitters, the government will need to cut next year's deficit sharply. Prominent Saudi economists contacted by Reuters expect the 2016 budget to plan spending of about SR800 billion ($213 billion), roughly 20% lower than their estimate of this year's actual spending.

The government is likely to curb public sector wage rises and bonuses, but that is politically sensitive, so most spending cuts would occur in public investment.