Published: 09:58 AM, 20 August 2020
Janomot report: Saudi Arabia has been trying to diversify its economy for decades, as emphasised in Vision 2030, launched by Crown Prince Mohammad Bin Salman.
But the the dual shocks of coronavirus and tumbling energy prices have hurt its plans, particularly in the non-oil sector, which is forecast to contract by 14 percent this year.
For your average citizen in Saudi Arabia, that means only one thing - more belt tightening. These are the key threats.
Oil revenues account for around two-thirds of the kingdom’s exports. But while Saudi Arabia was once responsible for nearly 30 percent of global oil exports, that figure has now dropped to just 12 percent, according to Capital Economics.
Riyadh started a price war in March in an apparent bid to damage rival producers, even as global demand was sinking due to Covid-19. It flooded the market, but in doing so saw its crude export revenues dropped by 65 percent compared to April 2019. “The sharp decline in oil prices, exacerbated by demand loss from the pandemic, has hit Saudi Arabia particularly hard,” said Boris Ivanov, founder and managing director of consultancy GPB Global Resources.
Prices have recovered since to about $44 a barrel – but that is still well below the $77.6 a barrel that the kingdom needs to balance its budget. Nor is there any sign that it will return to those levels.
Nor is the global outlook positive: demand is projected to fall “by 8.1 million barrels a day, the largest in history” because of Covid, according to the International Energy Agency (IEA). Looking forward, the organisation predicts that demand will peak by 2030 due to the rise in renewable energy.
Saudi Arabia had hoped that tourism would be a key part of Vision 2030, Crown Prince Mohammed bin Salman’s diversification project, with a target of 100 million visitors a year by the end of the decade.
In the wake of Covid-19, Riyadh is now predicting a 35-45 percent decline in tourism - equivalent to a drop in revenues of $28bn in 2020. Those numbers seem optimistic, given the global industry is predicting a fall of 58-78 percent this year.
“Any country depending on tourism is reassessing things in light of the pandemic,” said Bessma Momani, interim assistant vice-president, international relations, at the University of Waterloo.
Another setback is the decision to limit the annual Hajj to 1,000 domestic pilgrims. Umrah pilgrimages have been halted since March. “Hajj is a big money maker, and the lost revenue is needed," said Theodore Karasik, a senior advisor to Gulf State Analytics. “Losing it for two years in a row will hurt.”
The kingdom’s population has been grown fast for decades, doubling since 1990. But for Saudis born during the past 30 years, jobs are in short supply.
Almost two-thirds of the population are under 30 - and most of them are unemployed university graduates.
A process of “Saudization” will see an estimated 1.2m foreign workers leave the kingdom by the end of 2020, opening up opportunities for locals – but only if businesses can survive the pandemic and its economic consequences, and are prepared to pay higher wages.
“Saudis are far more expensive than expats,” said Rory Fyfe, managing director of MENA Advisors, “so if firms are cutting expats due to cost considerations they aren’t going to be replaced with Saudis.”
Momani said: “This is going to be a real reckoning for the labour market. We have already seen trends of nationalisation in the labour force, and Covid will accelerate this.”
Low- to no-taxes were once a mainstay of Saudi life, only increasing in recent years as falling oil prices prompted the government to seek new ways to generate income.
When Riyadh first introduced VAT and reduced fuel subsidies in 2018, it dampened the economic hit by introducing a cost of living allowance for about one million public employees, budgeted at 1,000 Riyals ($267) a month.