Saudi Arabia enjoyed a decade of plenty between 2003 and 2013 but must now diversify during a period of scarcity.
Oil prices rose from US$30 a barrel to $110, allowing the kingdom to squirrel away about $700 billion of assets from the sale of oil.
But now, with investment banks predicting that oil will fall to between $10 and $20, Saudi Arabia is hoping that efforts to diversify the economy away from dependence on the oil industry and the public sector will allow it to continue to grow.
Later this month, the Saudi government will announce a series of economic reforms intended to help the kingdom weather the era of low oil prices. The plan follows the announcement of its budget for this year that includes energy subsidy reforms and a cut in expenditure.
In 2014, Saudi Arabia’s non-oil GDP stood at about 56 per cent of GDP. The sale of hydrocarbons accounted for 85 per cent of export revenues, and 90 per cent of government revenues.
By contrast, the oil industry accounts for less than 30 per cent of the UAE’s economy and 50 per cent of exports by value. The UAE earns about 65 per cent of its revenues from the sale of oil.
While Saudi Arabia now produces a larger range of exports than it did 20 years ago, these are concentrated in two sectors: minerals and petrochemicals. The value-added of goods exported has actually fallen over time as the kingdom moves towards exporting cheaper, less complex factor inputs.
Worse, it is easy to see why this is not really diversification. Demand for petrochemicals varies in step with demand for oil. Demand for minerals varies with demand for manufacturing inputs. Oil is a manufacturing input.
So when global demand for manufacturing inputs falls – now for instance, with China slowing – demand for minerals also falls.
Dependence on the public sector is the second of Saudi Arabia’s big vulnerabilities.
It plans to cut public spending this year to 840 billion Saudi riyals (Dh822.9bn), down from the 975bn Saudi riyals spent in 2015. With the economy so dependent on government spending, this reduction will slow economic growth further, analysts say.
The kingdom’s high per-capita incomes mean that a retail sector has developed without government help, according to the ratings agency Standard and Poor’s. The sector could fare badly if public sector wage cuts materialise.
The large public sector also makes the kingdom’s labour markets less efficient, according to the IMF. “The continued availability of public sector jobs discourages nationals from pursuing entrepreneurship and private sector employment,” the IMF says. “In addition to measures that improve the business environment, there is a need to fundamentally alter these incentives – to fill a “missing link” in current policies.”
Private companies, too, are dependent on government contracts. Their profitability relies on the Saudi government’s willingness to keep the taps open, the IMF says.
In short, the low oil price hits Saudi’s oil economy and its non-oil economy. Which means that, beyond the numbers, Saudi Arabia’s economy isn’t that diversified at all.
McKinsey estimates that Saudi Arabia would need $4 trillion in public and private investment up to 2030 to properly inoculate the kingdom’s economy from the oil price rout.
abouyamourn@thenational.ae
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