- Saudi Arabia’s Troubled Economy Could Bring Down Ruling House of Saud
by Ben Chu Economics Editor, http://www.independent.co.uk/
Economic View: The collapse of the global oil price since the summer of 2014 has destroyed the Kingdom’s public finances.
The smoke from the Middle Eastern firestorm ignited by Saudi Arabia’s execution of a prominent Shia cleric has served to obscure the Kingdom’s economic crisis. On Wednesday, the US Secretary of State John Kerry launched a frenetic round of telephone diplomacy to attempt to persuade leaders in Saudi Arabia and Iran to step back from edge. But in the medium term, it might well be the economic crisis that matters more.
The collapse of the global oil price since the summer of 2014 has destroyed the Kingdom’s public finances – hardly surprising given it relies on oil sales for 90 per cent of state revenues. The Kingdom’s budget deficit for 2015 ballooned to 15 per cent of its GDP.
The IMF estimated last year that Saudi Arabia needs a global oil price of around $106 (£72) a barrel to balance existing levels of expenditure with revenues. On Wednesday the price dipped below $35 a barrel and shows no signs of recovering – with a glut of Iranian supply expected this year after the sanction-lifting deal between Tehran and Western powers.
To cover its deficit, the Kingdom has been selling its stock of foreign exchange. Reserves worth $746bn in August 2014 have now fallen to $646bn. The IMF predicted last year that it would run out of foreign exchange reserves in just five years.
The Kingdom has finally taken corrective action. Last year it issued debt for first time and in December it unveiled an “austerity” budget. But austerity is a relative concept; Saudi citizens pay no income tax. Petrol and energy are dirt cheap, thanks to state subsidies. The Saudi government’s savings were dominated by cuts in planned building projects.