Why Western scenarios for Saudi Arabia are rubbish
The collapse of oil prices triggered an unprecedented fiscal crisis in Saudi Arabia and led many Western analysts to say the country was heading for socio-economic turmoil and even unrest.
Brent crude remains about 35% less than its 10-year average and, as with many other oil producers, Saudi government revenues were hard hit. Even as Saudi costs of oil production remained the lowest in the world and its position as the largest oil exporter was still uncompromised, observers predicted Riyadh would rapidly reach the breaking point because of massive government spending. Every year it spends as much as India, a country with a population 50 times larger.
These assessments were unfair and entirely discounted not only the vast potential of Saudi Arabia to balance its books and reconfigure the economy through reform but they also failed to apply fair methodology that contrasted the position of Saudi Arabia with other developing and developed economies.
The Saudi economic performance in 2016 exceeded expectations to keep the country on a steady path and the future holds enormous untapped potential that is inadequately cited in the media.
Saudi Arabia has largest Arab economy and is part of the Group of 20. Saudi gross domestic product (GDP) was estimated to be $646 billion in 2015 — just smaller than Switzerland and Turkey. With $540 billion in foreign exchange reserves — the fourth largest in the world — Saudi Arabia has more savings than Germany, Britain and France combined.
Comparing Saudi external debt of $134 billion — 19% of GDP and equivalent to $3,100 for each citizen — to other countries would be something to envy for many countries. Economies of a similar size, such as Turkey and Switzerland, have external debts of $405 billion — 55% of GDP and equivalent to $5,100 for each Turk — and $1.6 trillion — 229% of GDP and equivalent to $200,000 for each Swiss. French external debt is 222% of GDP (equal to $85,317 for each citizen) and the British external debt is 569% of its GDP (equal to $146,244 for each citizen).
To reach similar levels of debt as a portion of GDP to most other medium-sized economies, Saudi Arabia would need to burn its way through $1 trillion. So Saudi Arabia will have little problem raising another $25 billion from bond sales in 2017 as planned after its record-setting maiden bond sale of $17.5 billion last October.
Saudi Arabia is one of the world’s lowest taxing countries in the world, with corporate tax at 20%, personal income tax at 2.5%, payroll tax at 22% (for Saudi nationals) and no value-added tax (VAT) currently imposed.
When it imposes a VAT in 2018, Saudi Arabia and its Gulf Cooperation Council (GCC) partners will join 150 countries around the world utilising this revenue instrument in their tax systems.
Saudi Arabia also hosts one of the largest populations of expatriate workers — more than 11 million. The World Bank estimated expatriates in Saudi Arabia sent home remittances of almost $39 billion, second only to $61 billion sent out from the United States.
With such massive outflows of capital leaving the country every year, this is another revenue stream for the government to tap. Mohammed al-Tuwaijri, secretary-general of the Royal Court’s Financial Committee, said the government plans to raise as much as $3 billion by 2020 as new fees on expats are introduced.
With millions of skilled and semi-skilled jobs occupied by expats, effective Saudisation of the labour market, though challenging, gives the government a vast pool of opportunity to open up to locals for work and to retain billions from the economy within the country.
2016 was a testing year of austerity for Saudi Arabia as government spending cutbacks kicked in. Salaries were frozen and subsidies reduced but the government was also busy clearing backlogged payments. For example, it will soon have cleared close to a total of $40 billion in payments to construction firms — almost 80% of all its debts owed to the sector.
Saudi Arabia successfully reduced its budget deficit by more than expected in 2016 and aims to balance its books by 2020. This year Saudi Arabia will cut defence spending and reduce energy subsidies further while anticipating higher oil and non-oil revenue. The 2017 budget will be the government’s largest ever.