14 Nov, 2015

Spotlight: Saudi Arabia takes measures to cope with low oil prices

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RIYADH, Nov. 10 (Xinhua) — Saudi Arabia is feeling the heat of the dropping oil prices, and has been prepared to cut government spending to end decades of the nation’s dependency on oil-made wealth.

Although the measures are still waiting to be implemented, the country, which is in the middle of a months-old air war against Yemen’s Shiite Houthi group in a bid to restore the rule of the exiled President Abd-Rabbu Mansour, has announced through various government-backed plans to increase the prices of subsidized products such as oil and water.

The Focus Economics mentioned in a report recently that although the Kingdom continued to pump oil at record levels, the fall in crude prices observed throughout Q3 is likely to have hit growth in the all-important petroleum sector.

The report highlighted that business indicators continue to show healthy activity, but they did point to a slight deceleration in the non-hydrocarbon sector in Q3. Against a backdrop of rapid deterioration in the country’s finances, international reserves continued to fall in September and marked a nearly-three-year low.

International ratings agency Standard and Poor’s lowered its long-term credit rating for Saudi Arabia one notch to A+ after the kingdom’s deficit rose sharply because of low oil prices.

The agency maintained its negative outlook on Saudi Arabia, a key member of OPEC, saying in a statement that the decision reflected the challenges of reversing the “marked deterioration” in the Saudi fiscal balance.

The assertion, however, was rejected by Riyadh. “The evaluation… came as a hasty reaction, unjustified and not backed by reality,” the Finance Ministry said in a statement on Saudi Press Agency last month.

The rejection of the ministry of finance was backed by Saudi foreign minister, Adel al-Jubeir, who told the press in a security meeting in Bahrain in the beginning of Nov. that the kingdom can manage its deficits despite a steep drop in oil prices. He said that this year’s deficit is manageable.

On October 27, Oil Minister Ali al-Naimi signaled that the government is considering adjusting heavily-subsidized energy prices. According to the International Monetary Fund (IMF), the Kingdom spends around 100 billion U.S. dollars annually on oil and gas subsidies.

Early in October, a leaked note from the Finance Ministry ordered that all new projects be stopped and that expenditure be reduced, highlighting rising concerns over the state of the Kingdom’s finances, the report highlighted.

If the oil prices stay not much changed or further declines, the deficit of the state budget is expected to reach 21.6 percent of the GDP this year and 19.4 percent the next, according the IMF.

Although plans to hike oil prices have been officially put forward, Saudi columnist in Okaz newspaper Khalaf Al Harbi doubted that the country can move ahead with the plan similar to other Gulf countries, which already implemented it after raising pay for their nationals.

He believed that raising oil prices in a country that does not have a public transportation system would force the Saudis to pay half of their salaries for oil.

The cost-cutting policy will also cover other sectors, as the Ministry of Water and Electricity will raise by 50 percent tariff for water and sanitation services provided for government bodies and large industrial and commercial establishments starting Dec. 16, local Arab news reported earlier this month while quoting a source in the ministry.

The ministry stressed that the studies carefully prepared during re-pricing will have a minor financial impact and will not negatively affect the citizens, yet they will have an impact on capping the high consumption rates and water resources preservation.

Waiving subsidies might not be the only option Saudi Arabia could opt to, as according to a report published last month by the CNBC oil could be overtaken by tourism.

Speaking on the rapid growth of tourism to the country at an event organized by the Saudi government, economists and experts said that tourism and national heritage are the sectors most likely to become pillars for Saudi Arabia’s future economy, the report highlighted.

“Tourism represents the second most important economic sector in the Kingdom,” said economic analyst Fadl Saad Al Bu Ainaian.

“Despite its low contribution to the GDP of only 2.7 percent, development plans in tourism show its ability to raise its contribution to higher levels, and makes it more capable to develop targeted areas especially the rural and remote areas that need comprehensive economic development to create jobs and investment opportunities,” said the economist.

He said that the estimated volume of tourism market in the Kingdom is roughly about 80 billion Saudi riyals (21.3 billion dollars), aside from the income derived from pilgrims traveling to the Islamic holy site Mecca.

The Saudi economy is capable of withstanding any shocks caused by the current oil price slump, the World Bank’s Country Director for Gulf Countries Nadir Mohammed told London-based Al Sharq Al Awsat earlier this month.

The World Bank is committed to working with Saudi Arabia on a host of different projects and offering any technical assistance needed to keep the Saudi economy at its usual levels, he said.

“The Bank currently provides a number of different technical assistance programs to all Gulf countries in order to help them meet the challenges which their economies face in general,” he said.

He added, however, that Gulf countries were not in need of direct financial assistance from the World Bank, given that they all enjoy healthy national incomes.