Are Oil Revenues Still Sufficient to Pay for Saudi Arabia’s Stability?

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A handout picture released by the Saudi Press Agency (SPA) on February 2, 2015 shows Saudi new King Salman bin Abdulaziz chairing the cabinet meeting in the capital, Riyadh. AFP/SPA

By: Hassan Chakrani

Published Friday, February 13, 2015

A new era brings, inevitably, politically motivated spending. According to estimates, the administration of the new King Salman has allocated $32 billion to spend in various areas. This sum, which is meant to reinforce stability in the country, is below previous figures seen at various stages, yet its impact will be vital in the near-term amid huge challenges facing the king and the kingdom.

The failures of the financial management of Spain’s King Philip II are legendary. His country defaulted four times on its debt under his reign, with disastrous effects.

A study published by the University of Zurich’s Hans Jochen Foth in 2011 concluded that the Spanish throne in the period in question (1560-1598) had enough financial discipline to hedge against bankruptcy, and that what really broke the back of the kingdom was the failed invasion of England, and the defeat of the Spanish Armada for a multitude of natural, strategic, and tactical reasons.

From ancient history all the way to the House of Habsburg in Spain in the 16th century, it has always been obvious that each era has its extravagant, tyrannical, or simply unfortunate sovereign. The worst case would see all three qualities present in one person.

In the present era, Saudi Arabia is a living example of a kingdom undergoing one of the most critical periods in its history since its establishment in the early 20th century. In the past 10 years, we saw how Saudi Arabia scrambled to preserve its regional influence, as its strategic standing declined in many arenas. Even its relationship with its traditional ally the United States suffered, on the back of contradicting regional policies and changing dynamics in the energy markets.

The death of King Abdullah coincided with a dramatic collapse in oil prices, the cornerstone of the House of Saud’s rule. This has contributed to making the next phase that much more critical. However, all these considerations remain secondary compared to the main one, namely, the political money that the House of Saud use to prop up their power from the oil revenues.

The new king quickly used this money to jumpstart his reign. According to a recent Financial Times report, the political spending package, which is distributed as grants, social welfare, and investments, is worth $32 billion.

The spending package is part of a natural process in Saudi. There, the government is responsible for nearly two-thirds of overall investment, and spends lavishly on social welfare to maintain the legitimacy of a regime based on extremist interpretations of religion that go as far as to ban women from driving.

During various sensitive events in the region, the regime was able to use this money to support its legitimacy. At the peak of the Arab uprisings in 2011, immediately after the ouster of Zine al-Abidine Ben Ali in Tunisia and Hosni Mubarak in Egypt, King Abdullah launched a spending program worth $130 billion. According to the Financial Times report, which is based on the opinions of financial, political, and banking experts, the late king’s lavishness bought social stability for the last years of his reign.

Therefore, the question that arises now is: How long can Saudi Arabia maintain this stability and balance its budget in light of falling oil revenues? How can Saudi afford to pay for generous spending programs like the ones it put into action when oil prices were at $100 per barrel?
This is the challenge for the new king, a financial challenge by its very nature.

According to a report published by the IMF in January, on the back of falling oil prices, Saudi Arabia is posed to lose around $138 billion in revenues in 2015. This equates to about 25 percent of Saudi’s GDP.

A paper by Citibank corroborates this. It states that Saudi will lose nearly a third of its previous oil revenues due to falling prices.

The sharp financial decline intersects with two other important issues. The first is local, and involves the challenge of creating more than 2 million jobs for Saudis in the next 10 years, and consequently absorbing potential unrest among young people. Currently, Saudi Arabia is implementing an ambitious education policy that includes sending students to acquire knowledge in Western universities, but assimilating the graduates remains a big challenge.

The second important issue is the regional situation, which forces the Saudi regime to prop up its influence through generous spending. This has high costs that are not easy to maintain in light of the current crisis. Yet it is not really an option to abandon this policy, because losing regional bargaining chips means ending Saudi influence. Just as Saudi spends 4 percent of the GDP in fuel subsidies — the second largest in the region after Iran — it has to support allies to guarantee its loyalty.

In principle, Saudi Arabia is able to absorb the shock of falling oil prices and reduced revenues, in the near term. Saudi has accumulated formidable foreign currency reserves during the years of high oil prices — to the tune of $700 billion — which would cover three years of imports at current levels. In other words, if foreign currency stops flowing to Saudi coffers, the royal family can still finance the import of basic goods for the period we stated.

However, on the other hand, Saudi’s financial situation is among the worst in the GCC. The same IMF report said the Kingdom is expected to run a deficit of 10 percent of GDP in 2015, double the GCC average, and three times the Iranian deficit expected this year.

The deficit is due mainly to Saudi’s over-reliance on oil revenues to finance its budget, which requires a price of $80 per barrel to be balanced. In addition, there are the ambitious social welfare programs meant to guarantee stability.

Clearly, the Saudis are dealing with the reality of the recent developments in the global oil markets. On more than one occasion, they said their position on the market has to do with avoiding losing market shares to the United States and new producers. For this reason, they prefer to lose a little now, than to lose the whole game in a while.

Maybe the oil price will surpass $100 in less than two years as a result of falling investments. However, the extravagance the Saudi royal family is known for may no longer be possible. Their main concern today must go beyond oil production and competing with American producers.

So far, the Saudis have failed to create an economic environment that would focus on specialization and create jobs. This failure could cost the new king a lot, and could threaten him with an experience similar to that of King Philip II.

This article is an edited translation from the Arabic Edition.

Comments

SPAIN :
Charles V left Philip II with a debt of 36 million ducats & an annual deficite of 1 million ducats as a result Philip II defaulted 7 times in 65 years.

WWI : severe reperations imposed on Germany via the Treaty of Versailles led to decades of severe economic woe's in Germany.

INDEED THE CREDITORS -
DID NOT CARE THAT THE GERMAN PEOPLE WOULD STARVE TO DEATH.

Chancellor Adolf Hitler, in 1933 introduced the nationalozation of key industries - autarky (self sufficience) - tarrifs on agricultural imports.

BY 1938 THERE WAS FULL EMPLOYMENT IN GREMANY & WAGES WENT UP BY 10.9% IN REAL TERMS ( which translates as cash in the pocket for the workers)

Therefore in who's interests are AUSTERITY MEASURES (?)
NO ONES - the nation cannot pay nor repay because it is at a stand still - dormant - shut down.
AUSTERITY MEASURES ONLY SERVE TO DESTROY & DESOLATE.
So we have to ask ....
WHY DO WE LISTEN TO OUR ECONOMISTS WHEN THEY ARE HALF WITTED AT BEST.
For only a halwit or worst would recomend that a nation be shut down & its assets sold off at rock bottom price to pay debts.

Privatisation has not worked .....ha, ha, ha, ha,
"How so" you ask
Let us take electricity supply as an example....the supply of electricity is vital to a nation/city/town - therefore it must exist....but it cost a lot of money to run ....yes it does .....there is no profit in owning & running the electricity supply company of any nation.... greed muddles the mind....at the end of the grab for assets comes the running of the facility & the costs there of....alas it is too expensive & therefore debt is incurred & NEVER PRoFIT.

Your comment has little if anything to do with Saudi Arabia. As for the Saudi Arabia, their money and more so the oil they have is what has always protected that country and continuous to this very day. If there was no more oil, the country would be immediately overthrown by those who have a serious grudge against the Saudi royal family.

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