Pandemic fallout challenges Saudi economic plans

Monthly bonus for civil servants has been stopped and taxes on basic goods are tripling in July.
Tuesday 16/06/2020
Jiddah’s historical district is empty due to coronavirus restrictions.( AP)
Jiddah’s historical district is empty due to coronavirus restrictions.( AP)

LONDON –Despite the risks posed by the coronavirus pandemic, Saudi Arabia remains one of the most resilient economies in the Middle East and North Africa, with enough financial firepower to meet the challenge of COVID-19.

The economic downturn triggered by COVID-19 was already expected to overshadow the 2008 global financial crisis but it is now feared a bigger recession than the Great Depression of 1930s could lie ahead.

This comes at a time when 2020 was supposed to be Saudi Arabia’s year to shine as host of the prestigious G20 gathering of world leaders. Instead, the gathering this November will likely be a virtual meet-up.

It was also to be another year of sweeping change for Saudi Arabia. The kingdom had only just begun to swing open its doors to tourists and eye-popping concerts when the pandemic struck, spawning social distancing and lockdowns.

 “It’s unfortunate, but I think that some of the sectors that Saudi Arabia was most interested in going into are going to be hit hard,” said Bessma Momani, a professor of Middle East studies at the University of Waterloo in Canada.

“If you look at the investment that was being announced and part of the construction effort, a lot of it included theatre venues, concert halls… That’s really under risk.”

With Saudi cities under curfew and the country’s borders shut, even the upcoming hajj pilgrimage in Mecca could be cancelled or dramatically pared down. The hajj, which starts in late July this year, has not been cancelled in the 90 years since Saudi Arabia’s founding.

The hajj not only provides Saudi Arabia with immense influence and prestige among Muslims, it also generates around $6 billion in revenue for the government annually.

Since early April, Mecca has been under a strict 24-hour curfew. The Grand Mosque there housing the cube-shaped Kaaba, Islam’s holiest site, is closed to the public, and the smaller, year-round umrah pilgrimages have been suspended.

The impact of the coronavirus and low oil prices have forced a re-calibration of Crown Prince Mohammed bin Salman bin Abdulaziz’s ambitious plans to revamp the oil-dependent economy, which is expected to contract 3% this year.

Cuts of at least $8 billion are being made to mega-projects, like a futuristic city in the desert called Neom and luxury tourism resorts along the Red Sea.

Riyadh hopes to transition the country away from oil, but in the short-term Saudi plans rely on oil revenues, which have plummeted to below $40 a barrel.

After producing a market-jolting level of 12 million barrels a day in April, Saudi Arabia is now producing just 9.3 million barrels a day as it leads major oil producers in an agreement to cut production.

Revenue from oil is expected to generate just $133 billion in 2020 for Saudi Arabia, down 34% from last year and down 58% from highs in 2013, according to research by Jadwa Investment.

The seismic blows have also curtailed the state’s largesse of subsidies and welfare for citizens. A monthly bonus for civil servants has been stopped and taxes on basic goods are tripling in July.

A committee is being formed to review salaries in the public sector, where most Saudis are employed. That wage bill alone will cost the government $134 billion this year, half of all projected spending.

Despite the challenges, Saudi Arabia has relatively low debt and hefty financial reserves built-up during years of high oil prices. This has allowed the government to comfortably provide free health care and hotel quarantines for anyone with the coronavirus, including those residing in the kingdom illegally.

Saudi Arabia has one of the highest rates of coronavirus infection in the region, with the number of new daily cases reaching their highest level ever on June 15. The kingdom has confirmed more than 132,000 cases of the virus, including 1,011 deaths.

 A resilient economy

As the pandemic hits businesses across the country, the Saudi Industrial Development Fund (SIDF) announced today the launch of initiatives totalling 3.7 billion riyals ($986.40 million) to support private sector industrial enterprises impacted by the pandemic.

The initiatives include deferment and restructuring of loan instalments for small, medium and large enterprises, as well as medical ones. They also include lines of credit to finance operating expenses for up to three months for some small and medium-sized enterprises, SIDF said in a statement.

Saudi King Salman bin Abdulaziz Al Saud also allocated $2.4 billion to cover 60% of salaries for many Saudis in the private sector, where a $32 billion stimulus package was announced.

Jadwa Investment estimates that up to 75% of all Saudis who work in the private sector will have their salaries partially covered by the government during the pandemic.

To cover the budget deficit, Saudi Arabia has plowed into its net foreign assets, which have dwindled from nearly $740 billion in 2014 to less than $450 billion in April.

Some $40 billion in reserves were moved in March and April to the Saudi sovereign wealth fund to invest abroad as stock prices plunged.

The Public Investment Fund, which Crown Prince Mohammed oversees, purchased $7.7 billion worth of stakes in companies, including Boeing, Disney, Marriott, Facebook and Starbucks, as well as US banks Citigroup and Bank of America. The fund also bought shares in oil companies BP, Royal Dutch Shell and Total amid market volatility.

 In another move, the fund in April purchased an 8.2% stake in cruise line company Carnival and a 5.7% stake in Live Nation, the entertainment company behind concerts for the world’s biggest stars. The deals are worth some $872 million and were welcomed by both companies.

Domestically, Jadwa Investment estimates that 1.2 million foreign workers, many of whom work in hospitality, tourism, retail and construction, will leave Saudi Arabia by the end of the year.

Momani, the professor, said the expat exodus could provide a silver lining for women and young Saudis to fill some of those jobs.

“The one slow factor has always been women’s participation in the labour force. So there’s room to expand that,” she said. “This might be an opportunity with further Saudization of the labour force.”