Could Saudi relax its drive towards reforms as oil prices near $80 mark?
When oil prices hit rock bottom to $28 levels from $150 at highest peaks, and after tapping into $100s of billions from foreign reserves in government coffers to cover for resulting budget deficits, Saudi, the UAE, and the entire GCC began a drive towards reforms and economies away from oil.
Saudi reforms ranged from giving women deserved rights, investing in social infrastructure, boosting youth employment, introducing VAT and gradual removing energy subsidies, which are all efforts aimed at boosting revenues and cutting public expenditures.
These are the upsides of downturns.
The downsides of upturns is that governments begin to relax their reforms and shift focus away from fiscal consolidation, or policies aimed at reducing budget deficits.
And all indications point towards an upturn.
Gulf economies are expected to experience a 2.8% GDP growth in 2018 from 1.7% in 2017, according to the IMF, and crude prices on the move towards $80.
Could Saudi change the pace of its reforms?
The restructuring continues
Higher oil prices won’t change the pace of Saudi Arabia’s reforms, Saudi Finance Minister Mohammed bin Abdullah Al-Jadaan told CNBC Wednesday.
“Higher oil prices will only help reduce the deficit and build reserves, but we will continue our reform,” Al-Jadaan
“I assure you that there is a lot of excitement about reform and when you see results you get more energy to do more because you can see that it’s working and helping the economy,” Al-Jadaan added.
And how is the state of economic affairs?
Oil to fiscal balance
Increasing oil revenues are helping Saudi cut its fiscal deficit, which according to Al-Jadaan was reduced by 40% in the last two years.
Moody’s ratings agency reaffirmed Saudi’s “A1” credit rating on Wednesday, and said the outlook for the economy was “stable” with a “strong fiscal position; substantial external liquidity buffers; a large stock of proved oil reserves combined with low extraction costs; and prudent financial system regulation.”
“The government’s reform program, including the plans to balance the fiscal budget by 2023, could over time offer a route back to a higher rating level,” Moody’s said as reported by CNBC.
Jan Friederich, head of Middle East and Africa sovereign ratings at Fitch Ratings, told CNBC that there are concerns that structural and fiscal reforms in Saudi Arabia might take a back seat as oil prices edged higher.
“There was a great emphasis before trying to really entrench the reform path, but switching a little bit more towards focusing on growth, fiscal consolidation has been pushed a little bit to the back burner,” Friederich said.
Saudi 2018 deficit
Al-Jadaan said that Saudi had a projected budget deficit of $52 billion in 2018, or 7.3% of its GDP, down from $62bn last year.
Reuters reported the minister saying Q1 fiscal results showed progress in increasing non-oil revenues, towards Vision 2030’s plan to increase these from a current $43.4bn, to $1 trillion by that date.
In an interview with the Financial Times (FT), Al-Jadaan said the kingdom’s economy was set to bounce back into growth in 2018 after falling into recession last year, expecting a GDP rise over 2%, higher than IMF forecast of 1.7% for Saudi.
“The majority of the growth will be in the non-oil sector,” he said.
The minister praised the introduction of VAT and a $19bn stimulus package to support the private sector for kick-starting an SME sector bolstered by government infrastructural spending on education, healthcare and others.
The economic risks going forward are “skewed to the downside,” the IMF said in a new report, in which it urged Saudi Arabia and other oil exporters to press on with reforms, according to OilPrice.com, a prominent industry site.
New taxes, deficit reduction, labor market reforms and investments in non-oil sectors of the economy are crucial for Saudi, the IMF said.
Oil price volatility, trade tensions, geopolitical risk and a “sharp tightening of global financial conditions” are just a few of the potential pitfalls that lie ahead, reported the IMF.
“The tightening of global financial conditions, if interest rates will continue to go up and liquidity will be less available, this will affect countries with a high level of debt — mainly oil importing countries where the average debt exceeds 80 percent (of gross domestic product),” Jihad Azour, director of the Middle East and Central Asia Department at the International Monetary Fund, told CNBC on Monday.
He believes that the “region needs to create at least 25 million jobs for the young generation in the next five years.”
The IMF claims that the Kingdom needs about $88 per barrel to balance its budget, according to OilPrice.com.