Saudi Arabia's Post-Oil Plan Off to a Rough Start in Year One
(Bloomberg) -- The first year of Saudi Arabia’s drive to reduce its oil dependence may end with the opposite result.
A flurry of cost-cutting measures will likely push the non-oil economy into recession, analysts say. That means that any overall growth in 2016 will be largely due to record crude output.
Efforts to manage the fallout from cheap oil gathered steam over the past two weeks. Policy makers have suspended bonuses and trimmed allowances for government employees. Ministers’ salaries were cut by 20 percent. The central bank also said it’s injecting about 20 billion riyals ($5.3 billion) into the banking system to ease a cash crunch.
Austerity will help Saudis reduce a budget deficit that reached 16 percent of gross domestic product last year. But it will also likely exacerbate the economic slowdown as consumption falls. A Bloomberg survey shows overall growth at 1.1 percent this year, with Capital Economics and BNP Paribas both predicting the first contraction since 2009.
“The hits to households are getting bigger and bigger,” said Jason Tuvey, Middle East economist at Capital Economics in London.
Pessimism
The growing pessimism about Saudi Arabia’s short-term outlook highlights the challenge facing Deputy Crown Prince Mohammed bin Salman, the architect of economic policy, as he seeks to prepare the kingdom for the post-oil era without provoking a backlash from a population accustomed to state largesse.
Even before announcing his so-called Vision 2030 in April, the government had raised the prices of fuel and utilities. It’s also weighing plans to cancel more than $20 billion of projects, people familiar with the matter have said. The International Monetary Fund expects the budget shortfall to drop below 10 percent of GDP in 2017.
National Commercial Bank, the kingdom’s biggest lender by assets, said in a report on Wednesday that third-quarter corporate earnings “are expected to be on the negative side.” “The weak outlook” has also deterred companies from going public.
Policy makers are trying to soften the blow of austerity. The central bank ordered lenders to restructure loans that Saudis can no longer afford. In an interview with Bloomberg News in April, Prince Mohammed said the government is developing a mechanism to provide cash to low- and middle-income Saudis who rely on subsidies.
Contraction
The likely contraction in the non-oil GDP this year breaks a long streak during which its share of the overall economy increased steadily to more than 55 percent in 2015, according to official data. Growth, however, was fueled by public spending that relied on revenue from hydrocarbon exports to invest in infrastructure projects and create government jobs for Saudi nationals.
That made the spending cuts all the more painful. While the non-oil GDP grew 0.4 percent in the second quarter this year after contracting in the previous three months, private-sector activity was flat.
“With cuts to government spending and fiscal reforms, we don’t see growth coming from anywhere in the non-oil sector this year,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Prince Mohammed in April acknowledged the short-term challenges to growth. “We don’t expect it in the early years because they are years of reform, but after the years of reform we will expect very high growth,” he said.
His plan targets increasing the number of nationals seeking private-sector jobs to 50 percent by 2020, compared with a “regional benchmark” of 40 percent. The kingdom also aims to sell stakes in several state-run entities.
12
View Full Article
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- Blockchain Demands Attention in Oil and Gas
- Macquarie Sees USA Oil Production Exiting 2024 at 14MM Barrels Per Day
- Oman Sees Increasing Ship-to-Ship Transfers of Russian Oil Bound for India
- CNPC Opens Sea-Land Oil Storage and Transport Facility in Bangladesh
- US Govt Makes Record Investment of $6B for Industrial Decarbonization
- Perenco Still Searching for Missing Person After Platform Incident
- Eni, Fincantieri, RINA Ink Deal on Maritime Decarbonization
- Falcon Oil Declares Commercial Flow Test Results for Shenandoah Well
- Oil Falls as US Inventories Increase
- Czech Utility CEZ Bucks Weaker Prices, Demand to Log Record Annual Profit
- Equinor Makes Discovery in North Sea
- Standard Chartered Reiterates $94 Brent Call
- India Halts Russia Oil Supplies From Sanctioned Tanker Giant
- Centcom, Dryad Outline Recent Moves Around Red Sea Region
- DOI Announces Proposal for Second GOM Offshore Wind Auction
- PetroChina Set to Receive Venezuelan Oil
- Czech Conglomerate to Buy Major Stake in Gasnet for $917MM
- US DOE Offers $44MM in Funding to Boost Clean Power Distribution
- Oil Settles Lower as Stronger Dollar Offsets Tighter Market
- UK Grid Operator Receives Aid to Advance Rural Decarbonization
- Chinese Mega Company Makes Major Oilfield Discovery
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Another Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Vessel Sinks in Red Sea After Missile Strike
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension
- Equinor Makes Discovery in North Sea
- Standard Chartered Reiterates $94 Brent Call