Austerity Cutbacks Expose Further Cracks in Saudi Arabia Economy

Saudi Arabia’s economy contracted for two quarters in a row for the first time since the global financial crisis, as the kingdom grapples with low oil prices and its businesses struggle to cope with economic reforms.

The kingdom’s gross domestic product shrank 1% in the second quarter from the same period a year earlier, when it expanded 0.9%, according to official data released last month. The economy had contracted 0.5% in the first three months of 2017, news outlets reported.

Now the authorities are considering a more expansionary budget than planned for 2018, Finance Minister Mohammed Al-Jadaan said, as authorities seek to support an economy severely struggling under the weight of austerity cutbacks.

Authorities were already planning an expansionary budget, “and we are considering even a potential further expansion,” Al-Jadaan said in an interview at the Future Investment Initiative in Riyadh. “We think the economy requires that support and development requires that support.”

The biggest Arab economy contracted two quarters in a row this year after the kingdom cut its crude output to support prices. Growth in non-oil industries was too slow to pick up the slack as Saudi Arabia struggles with the impact of spending cuts. The construction industry shrank 1.6% after contracting 3% in the first quarter.

The drive to repair public finances is part of a larger program to overhaul an economy too dependent on oil. The plan includes selling stakes in state assets, including oil giant Saudi Aramco, creating the world’s biggest sovereign wealth fund as well as balancing the budget by 2020.

The International Monetary Fund told Saudi officials this year that they can afford to slow down the pace of austerity to avoid crippling growth. “They are saying you don’t need to do what you need to do in two years or three years, relax it,” Al-Jadaan said. “We are doing that," Bloomberg reported.

Local Bond Sales

The drop in oil prices in 2014 caused Saudi Arabia’s budget deficit to balloon to more than 15% of gross domestic product. To finance the shortfall this year, the kingdom raised more than $20 billion from international bond and sukuk sales.

Al-Jadaan said he doesn’t see the government selling more international bonds in 2017, but local sales are likely. “We will maintain the local market issuance just to make sure we are developing the debt market,” he said.

Future international sales “are not limited to US dollars, but today we don’t see the need to do anything but US dollars,” he said. “There is significant demand on Saudi papers and we just need to make sure we issue at the right price.”

More Subsidy Cuts

The government is still planning a further round of subsidy cuts later in 2017, he said. Officials propose to start a cash transfer program called the Citizen’s Account before the cuts to compensate Saudis for the impact on their pockets, he said.

Energy and utility subsidies have long been regarded as a key part of a social pact between the  six Persian Gulf Arab states’ (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) absolute rulers and their citizens. But with oil prices down more than 50% since 2014, governments are looking for ways to save money.

In 2016, the kingdom ordered cuts to allowances for state employees before reversing the decision in April after a surge in public grumbling. King Salman later ordered the payments returned retroactively after his son was named crown prince.

Al-Jadaan, seeking to dispel rumors that employees have not received their payments, said the money was given back.

“What we’re seeing is stagnation in non-oil activity,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Second-quarter data show still very lackluster demand” even after the government reversed a decision to cut or freeze bonuses and allowances for state employees, she said.

A Bloomberg survey conducted shows economists expect growth to grind to a halt this year, compared with a growth forecast of 0.5% in the previous poll.

Now foreign investors are allowed to participate in initial public offerings within Saudi Arabia and will be given access to a stock market aimed at small and medium-sized businesses. The kingdom aims to raise about $100 billion by taking a portion of its state oil giant public next year.