Saudi Arabia: Just how deep are its troubles?

      Published on Thursday, 14 May , 2020      4781 Views     
Saudi Arabia: Just how deep are its troubles?

  • Saudi News

Once famous for being tax-free, Saudi Arabia has announced it is trebling its Value Added Tax (VAT) from 5% to 15% and cancelling the monthly living subsidy from next month.

The moves come as global oil prices have crashed down to less than half what they were a year ago, slashing government revenues by 22% and putting major projects on hold.

Saudi Aramco, the state oil company, has already seen its net profit fall by 25% in the first quarter of this year, mainly due to the collapse in crude oil prices.

“These measures reflect a drastic need to rein in spending and to try to stabilise weak oil prices,” says Gulf analyst Michael Stephens. “The Kingdom’s economy is in a terrible state and it will take some time to recover any sense of normality.”

Image copyrightAFPMan filling his car at petrol station in Riyadh (file photo)
Image captionThe cost of living In Saudi Arabia has grown, while oil revenues have fallen

Covid-19 is currently wreaking havoc with an economy that depends in large part on millions of unskilled expatriate workers from Asia, many of whom live in crowded, unsanitary conditions.

Meanwhile the crown prince, while still largely popular at home, remains something of a pariah in the West due to lingering suspicions over his alleged role in the killing of Saudi journalist Jamal Khashoggi.

International investment confidence has never fully recovered from his grisly murder and dismemberment by government agents inside the Saudi Consulate in Istanbul in 2018.

Mohammed bin Salman is asked: "Did you order the murder of Jamal Khashoggi?"
Video caption Mohammed bin Salman is asked: “Did you order the murder of Jamal Khashoggi?”

Then the war in neighbouring Yemen has bled Saudi coffers for more than five years now with no tangible gains, and a spat with Qatar has wrecked the surface unity of the six-nation Gulf Arab Cooperation Council (GCC).

So, is Saudi Arabia in serious trouble?

‘Built-in resilience’

First, some perspective. The coronavirus pandemic has wrecked economies all over the world and Saudi Arabia is no exception.

It does have a sovereign wealth fund, the Public Investment Fund, to fall back on, with an estimated value of $320bn (£260bn; 295bn euros).

It also has Saudi Aramco, the majority state-owned oil company, valued last year at $1.7 trillion – equivalent to the combined worth of Google and Amazon at the time.

Saudi Aramco sign in Abqaiq, Saudi Arabia (file photo)
Image caption State-owned Saudi Aramco is still the most valuable company in the world

By selling off just a tiny fraction – 1.5% – Saudi Arabia raised more than $25bn in the biggest share listing in history.

“Saudi Arabia has quite a lot of resilience built in,” says Sir William Patey, former British Ambassador to Riyadh between 2007-10. “They have a lot of reserves to keep them going and they could still come out of this oil price slump with their market share intact or even improved.”

Saudi Aramco traces its history back to the 1930s
Video captionSaudi Aramco traces its history back to the 1930s

The strategic threat to the country from Iran appears, at least for now, to have subsided following last September’s missile attack on its oil refineries and then the later US assassination of Iran’s Revolutionary Guards commander Qasem Soleimani in January.

This month the Pentagon has withdrawn Patriot missile batteries sent as an emergency defensive measure. The latent domestic terrorist threat from jihadists linked to the Islamic State group (IS) and al-Qaeda, while not completely vanquished, has been largely reduced.

Model showing planned King Abdullah Economic City (file photo)
Image caption Economic pressures have put huge development plans at risk

In the first quarter of this year there is a budget deficit of $9bn.

This is not the first time Saudi Arabia has had to hit the austerity button. In May 1998 I attended the GCC summit in Abu Dhabi when then Crown Prince Abdullah gave a stern warning to his fellow Gulf Arab rulers.

“Oil is at $9 a barrel,” he told them. “The good times are over – they’re not coming back. It is time for all of us to tighten our belts.”

In fact, the oil price later rose to more than $100 a barrel, but not before the government had introduced a hiring freeze and a nationwide slowdown in construction projects.

This time it may be more serious.

Coronavirus and oil price collapse have torpedoed projects all across the kingdom, calling into question whether the crown prince’s much-vaunted Vision 2030 programme can still be achieved.

Security guard checks the temperature of a shopper in Riyadh (04/05/20)
Image caption Saudi Arabia has one of the worst rates of coronavirus infections in the Middle East

The programme, which aims to wean the country off its historic dependence on both oil revenue and expatriate labour, has at its heart a massive $500bn futuristic city in the desert called NEOM.

Officials say this is still going ahead but most analysts believe cutbacks and delays are now inevitable .

“The private sector in particular will be hardest hit” by the austerity measures, says Michael Stephens.

“The kingdom’s emergency measures are harming the job creators, which will make it even more difficult to recover in the long term.”

Global standing

Saudi Arabia’s global reputation was critically damaged by the Khashoggi murder and the initial botched cover-up.

Even the Saudi ambassador to London called it “a stain on our reputation”.

The subsequent trial and convictions, which allowed some of the leading suspects to walk free, have attracted further criticism from human rights groups and the UN special rapporteur into extrajudicial killings.

Category Saudi News | 2020/05/14 latest update at 7:00 PM
Source : BBC | Photocredit : Google
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