Saudi Arabia is known as the Power Center of the entire Islamic World, however due to some unprecedented issues, like many countries in the region before it, Saudi Arabia is on the brink of a perfect storm of interconnected challenges that could crash the Saudi Economy beyond any repair, most probably within the next decade or may be earlier.
The Biggest reason is the collapse of the global oil price since the summer of 2014, this has destroyed the Saudi Arab’s public finances –Saudi relies on oil sales for whooping 90 per cent of state revenues. The Kingdom’s budget deficit for 2015 ballooned to 15 per cent of its GDP, which is massive by any parameter.
Collapsing state finances amid low oil prices and dubious plans for financial reforms, triggered Fitch to cut the kingdom’s rating down from AA- to A+.As one of the world’s largest crude oil producers, Saudi Arabia has been hit by a major fall in prices, which went from more than $100 a barrel in 2014 to around $30 last year and remain little over $50 today.
The crash, coupled with huge state spending, has seen the Middle Eastern country’s budget deficit hit record levels.The government has pushed the Panic button and drawn up plans to diversify away from its huge reliance on oil, as the days of its monopoly on the market have come to a close with the US shale revolution.Saudi along with other countries in OPEC a last year agreed to cut production in the hope of raising prices.
The IMF estimated last year that Saudi Arabia needs a global oil price of around $106 (£72) a barrel to balance existing levels of spending with revenues. On Wednesday the price dipped below $35 a barrel and shows no signs of recovering – with a surplus of Iranian supply expected this year after the sanction-lifting deal between Tehran and Western powers.
However USA is also playing a game very well, when values go up, America simply ups its shale oil production, keeping a lid on the value of a commodity.
To cover its deficit, the Kingdom has been furiously selling its stock of foreign exchange. Reserves worth $746bn in August 2014 have now fallen to $646bn. The IMF warned last year that Saudi Arab would run out of foreign exchange reserves in just five years.
The Kingdom is trying everything possible to correct this mess. Last year it issued debt for first time and in December it unveiled an “austerity” budget. But austerity is a relative concept; Saudi citizens pay no income tax. Petrol and energy are dirt cheap, thanks to state subsidies. The Saudi government’s savings were dominated by cuts in planned building projects.
Many argue high welfare spending is needed to keep a lid on tribal dissent. Saudi also has a potential generational powder keg to worry about. Youth unemployment is high, with almost a third of 15 to 24-year-olds out of work. And with almost half of Saudi’s 31 million population under 24, the potential for unrest if living standards are squeezed is obvious.