Dr Jasim Hussain
It is clear that the ongoing events in Yemen didn’t lead to a rise in oil prices. Perhaps we can say that the crisis in Yemen has put an end to falling oil prices, a phenomenon that began in 2014.
It is not surprising that oil prices are essential to the welfare of the Saudi economy, whereas the Kingdom remains the largest oil exporter in the world.
The level of production in Saudi Arabia reaches about 9.8 million barrels per day, nearly 7 million of which are allocated for export. But it is expected that the domestic demand for oil products will increase and bypass exports due to economic growth — especially of industries — and population growth.
It is noteworthy that Saudi Arabia had the honour of being the largest oil producer in 2013 by producing 13 percent of the global output. Russia and the US came in second and third by contributing about 12 percent and 11 percent.
The oil sector plays a pivotal role in the Saudi economy, accounting for nearly 85pc of the general Treasury revenues, the same percentage with respect to export earnings, as well as 50pc of GDP. These figures confirm that the Kingdom’s economy has a long way to go in order to achieve the desired economic diversification.
At the very least, the phenomenon of falling oil prices provides an opportunity to search for realistic alternatives to suit the Saudi economy. Logically, it is better to look for alternatives in light of the relatively high crude oil prices.
Fortunately, economic conditions in Saudi Arabia are very good. According to official sources, the actual expenditure for the fiscal year 2014 amounted to about $300bn.
This is more than the number that was adopted by the general budget of $230bn, which is exciting and a sign that the authorities are interested in providing more conditions for achieving better economic growth rates.
Certainly, the size of public spending in Saudi Arabia is qualitatively strong as it forms 39 percent of GDP. On the negative side, this statistic reveals the large relative presence of the public sector in the domestic economy, competing with the private sector for obtaining services and banking facilities, for example.
The size of Saudi Arabia’s GDP reached nearly $780bn without any close competitor among Arab countries, the Middle East and North Africa. Saudi Arabia’s GDP ranks in the list of top 20 largest economies in the world.
This probably explains why Saudi Arabia and no other Arab country is a member of the Group of Twenty, which includes major world economies such as the United States, China, Japan and several EU countries like Germany, France and Britain; as well as Brazil, India, Russia and South Africa.
In every respect, the boost spending shares contribute to raising the real GDP growth, which was 2.7 percent in 2013 to become 3.6 percent in 2014. This has been achieved partially due to the absence of inflationary pressures, as a result of many issues like the decline in oil prices.
The GCC economies have suffered a lot between 2007 and 2008 in what is known as imported inflation, at the time of the synchronised phenomena of rising prices and falling dollar. However, at the time when there was no reason for the importer of oil to raise the prices of exported products under the guise of continuously declining oil prices.
Looking ahead, there has been increased speculation recently over a hypothesis, which says that Saudi Arabia might go for the option of borrowing to cover the expected shortfall of its 2015 budget.
It is noteworthy that the 2015 fiscal year’s budget was prepared to include expenditures of $230bn, compared to revenues of $191bn, and thus the expected deficit was monitored to be around $39bn.
There is a possibility that there will be an expected increase in the budget deficit to reach $106bn, taking into consideration lower oil prices and therefore, oil revenues (Jadwa Investment is the source of this expectation). The figure may be much less in the event of reaching better prices but there is almost an agreement that it would not be surprising to Saudi Arabia to adopt the option of borrowing for the first time in 15 years.
The other option is to benefit from the Kingdom’s general reserve. Saudi Arabia has a huge sovereign wealth fund estimated at about $763bn, according to the latest data from Sovereign Wealth Institute.
This figure accounts for roughly 11 percent of the size of sovereign wealth in the world, which is considered by all accounts a huge fortune. Saudi Arabia ranks below the UAE with respect to the size of sovereign wealth whereas Saudi Arabia has a balance that is nearly $1.1 trillion or about 15 percent of global wealth.
In all cases, the Yemeni crisis doesn’t allow the opportunity of reducing costs, but it may cause the opposite as it requires expenses. Even in the event of a political solution to the crisis in Yemen, Saudi Arabia is expected to lead the reconstruction process.
On the other hand, the continuity of another challenge which is the unemployment among the youth stands as an option for expenses in the public sector. In fact, it is not wrong to assume a link between the maintenance of public sector expenditure and the need to address unemployment.
There is no doubt that unemployment among youth is disturbing; a specialised report that was released by the end of 2014 by the World Economic Forum, revealed that the unemployment rate among young Saudi people is around 28pc.
This number is considered the worst in the GCC followed by Bahrain and Oman. This is due to people under the age of 20 forming almost half the population.
The writer is economist and researcher on GCC economies.
