Saudi Arabia is on the Brink of a Painful Recession

Saudi Arabia’s new Deputy Crown Prince Mohammed bin Salman is in for a rocky ride ahead as the country lurches on the brink of the first non-oil sector recession for 30 years. Non-oil DGP contraction is proving to be painful as the non-oil sector struggles in the face of harsh economic reforms. The country’s economy is in a poor state despite being the largest economy in the Middle East.

Tough Economic Reforms

Deputy Crown Prince Mohammed bin Salman is responsible for many economic reforms in this oil-rich gulf state. He has implemented a series of bold reforms as the country – and its neighbours – struggle with low oil prices. Unfortunately, his efforts to wean Saudi Arabia away from its dependence on oil income have not had the desired effect. Instead of welcoming a new and prosperous era for Saudi Arabia, the population is unhappy and highly qualified young people are being forced to work low-paid jobs. There are plans to cancel more than $20 billion of projects in a bid to save money.

Public Sector Cuts

Employees in the public sector have had their benefits cut; with teachers and doctors all having to deal with drastically reduced pay packets. And it’s not just the public sector that’s feeling the strain of Deputy Crown Prince Mohammed bin Salman’s reforms. Many government invoices have gone unpaid, which is causing many problems for large companies employed on government contracts. These companies are finding it difficult to pay their own creditors and employees, although this is an issue the government has finally acknowledged. Indeed, the Saudi government has somewhat belatedly agreed to set aside some $27 billion to settle its debts to private sector companies, which should go some way towards easing the pain.

Poor Future Growth Forecasts

Deputy Crown Prince Mohammed bin Salman’s austerity measures, which were outlined in his so-called Vision 2030 plan, are for the greater good and the majority of the population do recognise this fact, but nevertheless, it’s a painful process. Non-oil growth has dropped to 0.07% in the last economic quarter, which is considerably lower than the 3.5% recorded in the same quarter of last year. Future growth forecasts are not especially heartening either, with a planned sales tax coming into effect in 2018 and further pension cuts guaranteed to provoke anger and unrest in many quarters.

A Step Too Far

Until now, Saudi Arabia has been dominated by the all-powerful ruling family, but the recruitment of foreign consultants to help shape economic policies has caused a great deal of disquiet. There are many Saudis who feel that this is a step too far. Even planned initiatives to forge partnerships between the public and private sector, which bankers say will be a good thing for the Saudi economy, are deemed to be controversial. It hasn’t helped that Deputy Crown Prince Mohammed bin Salman recently splashed a million Euros on a super yacht, which was something of a PR disaster.

Saudi policy makers are trying to make the austerity measures less painful and Deputy Crown Prince Mohammed bin Salman does acknowledge that the next few years are likely to be very difficult. However, policymakers firmly believe that these tough reforms are necessary and for the greater good. 

Financial Disclaimer can be found here.