Caution and pessimism .. What is the future of the financial situation in Saudi Arabia?

Abdul Hafiz Al-Sawy

The statements of the Saudi Finance Minister, Muhammad Al-Jadaan, were followed, with a cautious vision, which is closer to the pessimistic view of the future of the financial situation. The value of the spending will be reconsidered as needed.

He confirmed his expectations of further cuts to public spending on May 2, 2020, adding that the negative repercussions of the Corona crisis will appear in the second quarter of 2020, which raised the concerns of investors in the Saudi Stock Exchange, about the future of economic performance, so the Saudi Stock Exchange tumbled the next day to statements Aljadaan about 7%.

Al-Jadaan's statements were not the only source of the future pessimistic vision of the Saudi financial situation, as the International Monetary Fund in mid-April in its report on the economic prospects in the Middle East and North Africa, predicted that the Saudi economy will shrink by 2.3%, due to the negative repercussions of Corona on the decline in demand for Oil on the international market.

consequencesNegativeFor the budget,
the negative results of the performance of the Saudi budget in the first quarter of 2020 were in line with the minister’s pessimistic vision, as its results showed a deficit of about 34 billion riyals, and a decline in public revenues, by about 22% in the first quarter of 2020 compared to the same period of 2019, as well as Overheads increased during the same comparison period by 4%.

The data of the Saudi Ministry of Finance indicated that the results of the first quarter of 2020 resulted in an increase in public debt amounting to 46 billion riyals.   

It is striking to look at the detailed figures of the performance of the Saudi budget for the first quarter of 2020, that military spending increased by 6% over the same period in 2019, but the most serious is the decline in spending on health and social development by 13%, while facing in the Kingdom health burdens Under the Corona crisis.

The decline in the financial situation of the Kingdom of Saudi Arabia cannot be read without looking at the structural imbalance in its economic system. The Saudi economy is still mainly dependent on a primary commodity, which is oil, which represents the mainstay of its merchandise exports, and oil is also the main supplier of public revenues in the Kingdom's budget.

Consequently, it was natural for the Saudi economy to be subject to external fluctuations in the oil market, up and down, despite the fact that Saudi Arabia is represented by a membership in the Group of 20, as well as its share of foreign exchange reserves rose to its highest ceiling of about 744 billion dollars in 2014, and has a balance in its fund Sovereign is estimated at $ 320 billion in 2019, but its known classification is that it is a developing country.

The shock of the oil price collapse in July 2014 reveals the structure of the Saudi economy based on the sole rentier source, which is oil, as financial indicators began to decline significantly through the return of their budget deficits after a surplus that continued from 2003-2013, and its index of public debt tended to rise, until It reached 732 billion riyals ($ 195 billion) at the end of March 2020.

IllPlanning
The indicators of the drop in oil prices in July 2014 were not a sufficient precursor to the Saudi plan to restore its accounts, but the political administration under the authority of Crown Prince Mohammed bin Salman made the wrong decision to enter the Yemen war, which drained huge resources that Saudi Arabia had not yet revealed.

In a next step, many evidences confirm the lack of sufficient studies for it, the Saudi political administration came to announce and implement a major investment project in the name of NEOM, with investments estimated at about $ 500 billion, in light of the region's suffering from great fog about its political and security stability, but rather the behavior is considered Saudi Arabia is one of the ingredients for this state of instability.

The step that led to a further decline in Saudi oil revenues was what Saudi Arabia did on 20 March 2020, by entering into what was known as the oil price war, bringing the price of oil to less than $ 30 on that date, which subsequently led to an agency Moody's 'credit rating' outlook for Saudi Arabia's credit outlook is negative after being stable.  

crisisCitizen
Talking about the macroeconomic indicators may be more important if it is addressed through its impact on the citizen's life, and by looking at the results of the Saudi budget in the first quarter of 2020, we find that there are two items that affect the citizen's life mainly, namely the item of subsidies, which decreased spending It has reached 3.4 billion riyals, compared to 10.3 billion riyals in the same period in 2019, and the rate of decline between the two comparison periods was 66%.

The second item that most affected the life of the Saudi citizen was the decline in spending on social benefits to 12.9 billion riyals, compared to 17.2 billion riyals in the same period in 2019, and the rate of decline was 25%.

The Saudi government may resort during the coming period to impose more taxes, or increase the prices of goods and services, for some financial treatments, which are consistent with the policies of the International Monetary Fund, in order to create a kind of financial balance.

WayDebt
experiences of the past indicate that the Saudi economy continues on the same track, as the budget deficit and public debt phenomena widen, until oil prices improve in the international market, to exceed rates with which debt repayment can be achieved, and then achieve a surplus through which the trend can be to increase foreign exchange reserves and expand The direct and indirect investments of the Kingdom. 

But this time, the period during which the public debts and the Saudi budget deficit will continue, will be prolonged due to the non-positive outlook for the performance of the global economy, and the continuing demand for oil is low in the medium term at least. On the other hand, Saudi Arabia has signed the "OPEC Plus" agreement which obliges it to reduce Its oil production at levels that lead to a decline in its oil revenues. 

According to the estimates of the International Monetary Fund, the price of a barrel of oil that achieves parity of the Saudi budget at $ 70 a barrel, which is difficult to reach during the years 2020 and 2021, and may extend to more than that. Hence, the continued deficit of the Saudi budget and the worsening of its public debt will continue during the years Next five, if not more.

However, the important aspect with regard to the Saudi financial situation is what is related to the new financial policy, which was adopted by the principles of international financial institutions, which depend on debt financing, whether to pay the budget deficit or the financing of public investments, and therefore began talking concentrated by Saudi officials about that The ratio of public debt to GDP is still safe, and working in accordance with the principle of debt sustainability provides Saudi Arabia with access to more domestic and foreign debt.

The principle of debt sustainability simply means the ability of the state to pay the debt burdens in installments and interest on a regular basis, without delaying or inability to pay those burdens, or requiring rescheduling.

The seriousness of the situation in Saudi Arabia is that it has a clear financial vision through the use of debt, but it did not provide a clear time program to employ and pay these debts, which means that future generations will be burdened with these debts.