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Saudi Arabia has admitted that it owes billions of dollars to private firms and foreign workers after oil revenues collapsed.
Saudi Arabia has admitted that it owes billions of dollars to private firms and foreign workers after oil revenues collapsed.

S. Arabia Walks the Fiscal Tightrope

The future is uncertain for Saudi Arabia. After years of reliance on oil revenues, it now faces a commodity downturn that does not appear to have an end

S. Arabia Walks the Fiscal Tightrope

Saudi Arabia recorded the first fiscal budget deficit since 2009 in 2014 with a shortfall of SAR54 billion ($14.4 billion) and the first back-to-back budget deficit since 2002 in 2015 with a shortfall of SAR367 billion ($97.9 billion). The expected budget deficit for 2016 is SAR268 billion ($71.5 billion).
Several initiatives have been taken to increase foreign investment in an attempt to mitigate the decline in foreign reserves as a result of these budget deficits, news outlets reported.
The first step was opening the Saudi Stock Market known as the Tadawul to direct foreign investment on June 15, 2015. The second step was the issuance of $17.5 billion in bonds to international markets on October 20, 2016. The final step may be the initial public offering of 5% of state-owned oil company Saudi Aramco that could yield up to $100 billion.
The opening of the Tadawul to foreign investment has failed to yield tangible results. In fact the index has fallen from 9,561.70 on June 15, 2015 to 5,651.80 on Oct 20, 2016. The bond sale allowed the repayment of several contractors that had payments delayed since 2015 as a result of the drop in oil prices.

  Austerity Measures
Persistently low oil prices and back-to-back budget deficits have also forced the Saudi government to begin implementing austerity measures in an attempt to rein in government spending on entitlements.
A listing of measures follows:
December 2015—subsidies for fuel, electricity and water were cut.
August 2016—government fees and increased fines for traffic violations were announced.
September 27, 2016—the salaries of government ministers were cut by 20% and other government employees had bonuses and other benefits eliminated.
Oct 4, 2016—the Gregorian calendar will replace the Islamic calendar for public-sector employees, resulting in employees working 11 additional days a year for the same pay.
Oct 11, 2016—announcement that capital spending reduced to $20.2 billion from $70.2 billion in 2015 and $98.7 in 2014.
In addition, the government is planning to raise additional revenue through a value-added tax, taxes on expatriate salaries, and international remittances.

  Owes Billions to Private Firms
Saudi Arabia has admitted that it owes billions of dollars to private firms and foreign workers after oil revenues collapsed, the kingdom’s new finance minister said.
The arrears have left tens of thousands of foreign workers, chiefly in the construction sector, struggling for months while they await back pay.
“I don’t recall the exact amount now but its billions of dollars,” Mohammed Aljadaan told reporters on Thursday.
“The ministry is seeking to make thousands of payment orders every day,” he said.
Payments were delayed because of “the sharp decline in oil revenue and the measures taken by the kingdom to reduce spending on a number of projects,” the official Saudi press agency reported.

  Uncertain Future
The future is uncertain for Saudi Arabia. After years of reliance on oil revenues, it now faces a commodity downturn that does not appear to have an end. In addition, the time and opportunity to diversify the economy has been squandered on public entitlements and capital projects that add no economic value to the economy.
As the Saudi economy declines, the companies within that economy that source their revenue domestically will also decline. In addition, creating inflation through debt issuance and removal of subsidies will cause consumers to curtail purchases as well as pressure the riyal /USD peg that is currently fixed at 3.75.
The kingdom’s gross domestic product will slow from an annual average of 5% in the five years to 2015 to 1.9% by 2020, underlining the depth of the slowdown.
The Saudi currency has also come under heavy pressure from speculators betting that the kingdom will be forced to revalue the riyal, while the domestic stock market has tumbled this year as investors fear that diminished oil revenues may push the economy into recession.

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