The sad state of Saudi Arabia

“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel” – Rashid bin Saeed al Maktoum, Prime Minister of the United Arab Emirates, from 1958 to 1990.

In Saudi Arabia, where development only occurred from 1980, where oil underlies almost every facet of the economy, and where there are strained diplomatic relations with many other countries, it would be almost intuitive to suggest that the country would have a plethora of economic problems. Strangely, however, till now, that hasn’t been the case. Although the aforementioned quote was intended for Dubai in the 20th century, it is indeed far more applicable today to Saudi Arabia than to Dubai, which has diversified with relative success (although it, too, has its own problems). To the mirth of much of the Western world, Saudi Arabia, along with a number of other Gulf nations, is introducing an extra value added tax (VAT) to add a much-needed newfound revenue stream. This is one of the many signs that the country’s rulers are feeling the pinch, from the continued downward path that oil has taken in recent months. But what exactly is wrong with their economy?

Many of the problems which Saudi Arabia has have been predicated on its over reliance on oil for much of its economy. With the petroleum sector accounting for around 80% of budget revenues, 45% of GDP, and 90% of export earnings, it is clear that the Saudis are heavily overexposed to this volatile sector. Despite numerous attempts to diversify, including opening up a Saudi stock exchange, the success of these attempts have been minimal at best, and Saudi Arabia is still a hugely oil reliant nation. Despite being overshadowed while oil was reaching new heights, the problem with this, as shown today with the falling oil price, is that when oil falls, so does Saudi Arabia. In 2015, the Kingdom’s fiscal breakeven price was $104.40, more than double what the oil price is now. To combat this drop in prices, they needed to utilise some of their substantial foreign exchange reserves, which dropped to $602,032 million in January 2016. Although these are still the fourth highest in the world today, they continue to drop, and given the low level which oil prices should continue to see with Iran’s entry into the market, the drop shows no sign of stopping. Incredible for a country that had one of the world’s strongest economies just a few years ago.

Increasing social tensions in the Kingdom, in amalgamation with falling oil prices, have also discouraged foreign investment and have led to substantially increased capital outflows. As a result of the falling oil price, 46 large projects have been cancelled by major oil and gas companies, leading to a loss of around $200 billion in revenue for the Saudi government. Since the Arab Spring, the behaviour of the Saudi government had resulted in net capital outflows reaching around 8% of GDP a year. The recent turmoil in the Middle East, of which Saudi Arabia has been part of, has led to global outrage, specifically from Tehran. This was simply the catalyst for even more messy relations between Saudi Arabia and Iran, culminating in the severing of diplomatic relations between the two Muslim countries. Although it has yet to be seen just how badly foreign capital outflows were affected, reports already suggest that they may be higher than ever before. In this regard, the Kingdom’s rival, Qatar, has been far more wily, not cutting off relations even despite continued aggravation.

Given these two main tensions which the Kingdom has, they have two choices: the first of which is to continue their extensive spending, and increase budget deficits further, or to impose further austerity measures (which they already have) and risk the ire of its citizens. The nature of Saudi Arabian society is certainly different from that of the Western world, and this perhaps has only been endured by the citizens because of the lavish spending which is heaped upon them. When this is taken away, the house of cards may indeed fall, and, in light of this, the Saudis may find the first option more beneficial, however, this carries with it a whole host of new economic problems. As a result of these problems, Saudi Arabia find themselves in a great deal of economic quicksand, out of which there is really no favourable outcome. Oil prices don’t look like going back to $100 soon, and because of this, Saudi Arabia are finally feeling the brunt of not diversifying soon enough. The sustained downward spiral does not seem like going away anytime soon, and so the Saudis may have to start preparing themselves for, let’s say, a jolt back to reality.

16 Comments Add yours

  1. John says:

    Great article, Shrey! Saudi Arabia’s economy has been a “house of cards”, as you said, for too long, and I can’t say I’m too displeased at its collapse.

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    1. Thank you so much 🙂

      Like

  2. Kaitie Creator of Fuchisa Freezer says:

    Very interesting and insightful article. I guess really what goes up must come down right?

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    1. Haha yes 🙂 Thanks ever so much for the comment 🙂

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  3. WE WANT CORBYN says:

    Tell your friend Aditya to go stuff himself and his asinine articles.

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    1. I think everyone has the right to an opinion, as does Aditya. Have a nice day 🙂

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      1. lobotero says:

        Well handled!

        Liked by 1 person

  4. cheekos says:

    Mr. Srivasta, great blog. As you continue to prepare for a career in business and finance–if that does, in fact, continues to be your life’s passion–do not forget to maintain a broad scholastic preparation. One of the things that made Apple (then) Computer great was what he learned when he dropped out off college. He sat-in on Lithography course at a college that he wasn’t even enrolled in. That’s what had given Apple the head-start in better graphics.

    Think of Wayne Gretzky, perhaps the greatest hops key star that ever played. When asked by reporters why he w was so great, since he’s not big and he’s not fast, his response was: I don’t know, I just skate to where the puck will be. Always look toward the next global need, evolution in technology, region to develop–and be aware of the problem ideas that will fall away.

    There is so much to be learned from studying the successful countries and, even, cities, as well as the fake skyrockets. Israel attracted many German and Russian scientists and engineers during the last half of the prior century, and Mumbai became the mecca for growth in India. Meanwhile, China has been a manipulated house-of-cards, and many countries just never focused on their commodity income, and spending the revenue that they brought in. In doing so, they failed to expand their economies, embrace public education, embrace technology, and grow beyond their various ethnic and tribal cultures which divide their people–rather than form teams to progress. Hence, the Saudis reverting back to driving camels.

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  5. cheekos says:

    Mr. Srivasta, great blog. As you continue to prepare for a career in business and finance–if that does, in fact, continues to be your life’s passion–do not forget to maintain a broad scholastic preparation. One of the things that made Apple (then) Computer great was what Steve Jobs learned when he dropped out off college. He sat-in on Lithography courses at a local college that he wasn’t even enrolled in. That’s what gave Apple the head-start in better graphics.
    
Think of Wayne Gretzky, perhaps the greatest hockey star that ever played. Reporters asked him why he was so great, since he’s not big and he wasn’t fast. His response was: I don’t know, I just skate to where the puck will be. Always look toward the next global need, evolutions in technology, regions to develop–and be aware of the problem ideas that will fall away.
    
There is so much to be learned from studying the successful countries and, even, cities, as well as the fake skyrockets. Israel attracted many German and Russian scientists and engineers during the last half of the prior century, and Mumbai became the mecca for growth in India. Meanwhile, China has been a manipulated house-of-cards, and many countries just never focused beyond their commodity income, and on spending the revenue that they brought in. In doing so, they failed to expand their economies, embrace public education, deverlop technology, and grow beyond their various ethnic and tribal cultures—which divide their people, rather than form teams to progress.
    Hence, the Saudis reverting back to driving camels.



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    1. Thank you so much 🙂

      Like

  6. Jen says:

    Interesting article, thanks very much.

    I would add a couple of things you might want to consider in case you decide to update the article in the future:

    – Saudi Arabia has been fighting a war with Yemen for the past 12 months and this war is sapping the KSA’s finances;
    – Saudi Arabia has been flooding the global oil market with oil to bring down oil prices and cripple the Russian economy (regarded as heavily reliant on exporting oil and natural gas) and the US shale oil industry, but this action (which the Saudis seem reluctant to review and reverse) is having the effect of crippling its own economy.

    I’m no expert on the situation and economy of the KSA but I understand that a large proportion of Saudi citizens (something like 20%) actually live in poverty and have not benefited much from Saudi spending. Average per capita GDP is not a really reliable guide as to how well average citizens live if there are huge socio-economic disparities in the society because a few extremes at one end (but not the other) will drag the average towards them.
    http://time.com/3679537/rich-nation-poor-people-saudi-arabia/

    Much of the KSA’s spending has been on American imports and investing in American stocks because under a deal made with the US government in the 1940s, the Saudis agree to sell oil to the US and receive US dollars which they then had to spend as per US directions.
    http://susris.com/2011/02/14/today-in-history-king-abdulaziz-and-president-roosevelt-meeting/

    I think you would benefit from reading Adam Curtis’ blog and the posts he has written on various Middle Eastern countries, and also from watching his 2015 documentary “Bitter Lake” (which tbh I have yet to see myself) on the relationship between the US and the KSA.
    http://www.bbc.co.uk/blogs/adamcurtis
    https://www.youtube.com/watch?v=1pn2z7zp1V0 (the documentary)

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  7. welcomepresence says:

    Enjoyed this thoughtful post Shrey, it certainly sounds like Saudi Arabia is in a tenuous position. I worry for those Saudis that are not part of the wealthiest groups in that society as they will probably bear the brunt of what’s to come.

    Like

  8. Great post shrey. We all have been knowing Saudi as one of the content country and read news on their extravagant and opulent possessions and passions. It was great to have an insight into the real world.

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    1. Thank you very much 🙂

      Like

  9. Keep up the good work! Perhaps the collapse of such weak foundations would do the Kingdom a favor as it would bring about a chance for repair and reform. Just so as long as the vulnerable population is protected. What do you think?

    Like

  10. armageddonandbeyond says:

    Great article thanks for sharing will reblog on my site

    Like

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