Saudi Arabia Under Severe Fiscal Pressures

For the first time since 2011, Saudi Arabia's foreign reserves have dropped below $500 billion. The  Saudi Arabian Monetary Authority said on Sunday that its foreign reserves had fallen by $8.5 billion in the past month, dropping to $493 billion. In total, foreign reserves have dropped by $36 billion this year, according to Bloomberg.

The news comes despite the kingdom raising $9 billion from its first international sale of Islamic bonds earlier this year, news outlets reported.

"The fact that reserves continued to fall despite the raising of $9 billion continues to imply a lot of government spending, but we aren't seeing meaningful signs of it in the Saudi economy," Monica Malik, chief economist at Abu Dhabi Commercial Bank, told Reuters.

Low oil prices have taken a toll on the Saudi economy, forcing it to dig deep into its foreign reserves. In response, Riyadh has begun making wide-reaching economic reforms, including instituting austerity measures and implementing taxes.

Last October, Deputy Economy Minister Mohamed Al Tuwaijri said that if these reforms are not followed, the kingdom faces bankruptcy within a few years.

"If we don't take any reform measures, and if the global economy stays the same, then we're doomed for bankruptcy in three to four years," he said.

Heading for Recession?

Economic experts suggested last year that the kingdom is headed for recession in 2017, for the first time since 1999.

According to an analysis by BMI Research, the kingdom's oil sector growth will continue to slow as austerity measures are implemented. The report predicted that the Saudi economy will contract by 0.2% in real terms this year. In 2016, the economy grew by just 0.8%.

But at the end of last year, Saudi Arabia's deficit shrank to $79 billion, roughly $8 billion less than the original budget's projections and significantly lower than the nearly $100 billion deficit of 2015.

"Our economy, thank God, is sturdy and it has enough strength to cope with the current economic and financial challenges," King Salman said introducing the 2017 budget, according to CNBC.

But despite optimism at the end of 2016, concerns still persist. Bank lending to the private sector shrank in March and April for the first time in 11 years.

Outlook Lowered

In its World Economic Outlook update of early 2017, IMF had drastically slashed its forecast for Saudi Arabia's GDP growth in 2017 from October 2016 WEO update figure of 2.0% y-o-y, to be now barely in the growth territory at 0.4%, Forbes reported early in May.

The same figure remained untouched in the just released April's update of WEO. The main argument behind that down revision is the anticipated drop in the oil GDP as a result of the cut in oil production in accordance with what the IMF called "OPEC's agreement" that is effective as of the beginning of this year.

The IMF plugged in the assumption that that production "agreement" will hold for the entire 2017. The expectation of slightly slower growth in the non-oil sector was a secondary trigger of the new number.

In other words, an approximately 5% reduction in oil production would decelerate the pace of overall GDP growth by 80% (comparing the previous forecast of 2.0% with the current 0.4% for 2017).

A somewhat less striking comparison could suggest that the IMF sees this slight decrease in crude oil production causing slower growth speed in the Saudi GDP by just over 70% (comparing 2016's growth of 1.4% with the new and bold 0.4% for 2017).

Unaffordable Arms Deal

“Weapons are like money,” said British novelist Martin Amis, “no one knows the meaning of enough.” That’s certainly true of Saudi Arabia, whose appetite for arms and addiction to petrodollars have caused an economic obesity that the US, which should be this kingdom’s dietician, has just set out to redouble, MarketWatch reported.

The $110 billion worth of arms deals that President Donald Trump and King Salman inked May 20 are beyond Riyadh’s means, irrelevant to its pressing needs, and injurious to American interests.

The deal is unaffordable for the Saudis because their seven fat decades are over due to oil prices’ historic decline, a trend whose grim repercussions the kingdom itself recognized in its plan to reinvent its economy by cultivating a manufacturing industry.

Riyadh’s boasting last fall that it had cut the budget deficit by nearly a quarter, from 376 billion riyals to 297 billion, did not change the basic fact that it had begun to spend money it didn’t have, something it never previously did.