By Irina Slav
Higher oil prices are invariably good news for oil-dependent economies. The latest price rally is particularly good news for the world’s top oil exporter, Saudi Arabia, whose budget deficit is this year seen to shrink to 5.6 percent from 9.3 percent last year, BMI Research said in a new report.
The 5.6-percent figure is a downward revision from BMI’s earlier projection that stood at 6.1 percent, and the market research firm now expects the Saudi budget to return to balance by 2024, probably on the premise that oil prices will continue to rise and so will production—a combination that is not the most natural one.
Unnatural it may be, but this is precisely the situation at the moment: Saudi Arabia is pumping more after in June the OPEC+ club decided to put an end to the production cuts aimed at eliminating a global oil inventory overhang. It has also just announced it will suspend oil and fuels shipments through Bab el Mandeb after Houthi attacks on two tankers, which has pushed prices higher, since the chokepoint is where a lot of Middle Eastern oil passes on its way to global markets.
Saudi Arabia was forced to tighten its belt during the last price crash, and it has demonstrated determination to continue with economic reforms despite improving prices. However, these reforms may affect economic growth negatively: Bloomberg recently reported that household debt in the Kingdom has risen two- to threefold since last year on the back of higher utility prices, a value added tax, and higher prices at the pump.
Inflation is rising, and sharply, swinging from a negative reading to 3% in the months from late 2017 to early 2018, and unemployment is also rising: as of March this year it was 12.9 percent among Saudi nationals, which is the highest in at least six years. In other words, it seems that the economic reforms prompted by the latest oil price collapse have turned into a problem for common Saudis, and this problem is putting the brakes on the economic growth that the Kingdom needs in order to fill its budget gap.
Yes, higher oil prices will increase oil revenues, which constituted some 63 percent of the Saudi budget revenue, as of 2017. They will also deter any attempts to diversify away from oil and oil products, which was the point of the reform push initiated by Crown Prince Mohammed. The Aramco IPO on which his Vision 2030 depends, according to many analysts, has been delayed again and may never happen after the government filled its coffers with the billions “donated” by high-ranking businessmen and members of the royal family who were last year detained on allegations of corruption.
Saudi Arabia wants to reduce the share of oil revenues in its budget total to below 50 percent but it wants to see these oil revenues rise by 80 percent over the next five years. This might make sense if it weren’t for the stated ambition of Riyadh to focus on non-oil growth. Saudi Arabia needs oil money to finance the non-oil expansion, and based on BMI’s and IMF’s latest projections, it looks like it will continue to depend on this oil money at least in the medium term. After all, they can’t release the austerity pressure until there is some solid growth in budget revenue, and oil is the most likely contributor. If prices continue up, that is.