On the Record

Global Economic Crisis: A Catalyst for Change in Saudi Arabia?

Hassan Hakimian and Navtej Dhillon

Editor’s Note: Experts from the Middle East Youth Initiative continue to monitor the effects of the global economic crisis on the region’s markets. Navtej Dhillon and Hassan Hakimian, Senior Lecturer in Economics at the Cass Business School, discuss the economic outlook for Saudi Arabia, a country which until now has enjoyed the benefits of windfall oil revenues, including low levels of public debt and ambitious state-led development projects. This comes as a continuation of our earlier series: “Food, Fuel, and Finance: How Will the Middle East Weather the Global Economic Crisis?

Navtej Dhillon: How do you think a drop in oil prices and contraction in GDP growth might impact Saudi Arabia’s real economy? Compared to other oil exporters, does it have strong cushions against the current economic shock?

Hassan Hakimian: The impact of the recent recession on Saudi Arabia—as elsewhere—will depend ultimately on how long the slowdown is likely to last. As with many other oil states in the Gulf, Saudi Arabia starts the current slowdown from a strong position given that it comes against a background of many years of high oil prices, which have left the Kingdom’s public finances in good shape after years of chronic deficit (public debt has fallen to below 12% of gross domestic product from over 100% a few years ago).

Having said that, there is no doubt that the immediate impact is significant—particularly on the private sector, which takes the main brunt of the current conservative banking practices and shrinking credit markets. It may sound ironic but the government’s overwhelming presence in the economy may be a blessing in disguise in the current conditions as the fiscal stimulus and various types of Keynesian measures used to resuscitate Western economies in the throes of recession can be relatively more easily adopted here: the government’s financial position is strong (it has benefited from fiscal surpluses since 2002) and the political will to avert the worst of the recession is also available in large measures.

According to the IMF’s latest estimates, Saudi Arabia is now expected to record a fiscal deficit of up to 3.1% of GDP, a marked decline from surpluses of 22.8% of GDP in 2008. Similarly, GDP growth is projected to slow down to 0.8% in 2009 (down from 5.5% in 2008). The main impact of the global crisis is through lower oil prices and revenue, which are projected to reduce oil export receipts by almost 50 percent in 2009. This is likely to translate itself into a drop in government balances of some 36% in 2009.

Despite this, the impact of the financial crisis is more muted in Saudi Arabia compared to elsewhere, as government spending has not only been sustained but in fact increased in the budget for 2009. According to the Finance Minister [Ibrahim Abdulaziz Al-Assaf], despite the combined effects of the collapse in oil prices and the envisaged increase in budgeted spending for 2009, which yields a projected budget deficit of 65bn riyals ($ 17.3bn), the Kingdom’s vast financial reserves would be its “first line of defense” to meet any deficits for this and next year, hence averting the need to resort to external borrowing.

Dhillon: In the Gulf, the construction and manufacturing sectors predominantly consist of non-nationals. How will the economic slowdown impact the migrant labor force in Saudi Arabia, and what will this mean for the local workforce?

Hakimian: The slowdown will be felt mainly in the private sector and in relation to the various construction projects in the pipeline. Here lies possibly the most tangible impact of the slowdown: the presence of a sizeable expatriate population in Saudi Arabia—although proportionally not on par with other smaller Gulf states, where the ratio of expatriates to locals is almost 90:10—offers the Saudis the first line of defense against the vicissitudes of the business cycle. Hence large numbers of migrant workers (especially in construction) would appear to be vulnerable to lay-offs in the coming months. In Dubai, this process has already taken its toll with large scale private sector redundancies reported recently, and the government has taken the unusual step of outlawing the laying off of UAE citizens by private sector entities. In Saudi Arabia, the expatriate population amounts to a sizeable absolute magnitude of over 6 million (about one third of the population) and although not always directly competing for jobs with the local youth among whom unemployment is the highest, the current slowdown may just offer the government a faster way (at least on paper) of achieving some of the more ambitious targets it has set itself for achieving “Saudization” of the local workforce in the years to come.

Dhillon: How can the government leverage the economic crisis as an impetus for internal reform?

Hakimian: Another possibly bright spot in the Saudi Kingdom—amidst a torrent of pessimistic news from around the globe—is that recently, the aging Saudi monarch took the unusual step of reshuffling the cabinet. A cabinet shuffle in Saudi Arabia is widely considered a rarity but this time, through a double act, King Abdullah has wrested control of the Saudi justice and education systems away from the most conservative elements of the clerical establishment and bestowed them to reformers. Moreover, he has appointed the first woman to a senior government post (assuming the post of deputy minister for girls’ education, which was until recently under the supervision of religious authorities rather than the Ministry of Education).

Normally, Saudi Arabia draws much external attention for reasons relating to the importance of oil as a key global commodity and the Kingdom’s geo-political position in the Gulf region’s security. This time, the internal dynamics of change may be just as important in the face of the current recession and the political and economic changes it may just bring about. In a country with a young demographic profile—those below 30 make up over 60 percent of the population—the need for change has not been as strong for quite some time, and yet the current situation forebodes a rare combination of both challenges from a long time past and a unique opportunity to confront them.

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