Saudi Arabia can circumvent its challenges

30/08/2015 06:11 AST

Saudi Arabia’s economy has the necessary financial wherewithal to overcome its several ongoing challenges, which has intensified due to steady dip in oil prices. The challenges include a widening fiscal imbalance, a drop in the Saudi bourse’s index and rising youth joblessness.

The SWF (Sovereign Wealth Fund) Institute puts the value the of Saudi Arabia’s sovereign wealth fund at $677 billion, the fourth highest in the world. The June number represents some 9.4 per cent of total SWFs in the world and the second largest within the Gulf after the UAE.

Saudi Arabia continues to enjoy notable credit ratings such as an AA- from Standard & Poor’s and AA from Fitch Ratings, providing a certain level of comfort for institutional investors interested in purchasing Saudi bonds. Nevertheless, both agencies opted to revise the outlook from stable to negative considering the adverse effects from the plunge oil prices and increased government spending. S&P made the move in February while Fitch followed suit this month.

Yet, Moody’s continues to maintain a positive outlook while affirming a long-term issuer of Aa3. Understandably, Moody’s is pleased with the kingdom’s strong financial assets for weathering the current plunge in oil prices.

A critical source of relief concerns the kingdom’s public debt. Saudi Arabia has an exceptionally low debt, making up around 1.6 per cent of the gross domestic product at the beginning of the year. Moody’s projects debt climbing to 6.4 per cent of GDP in the light of issuance of local bonds to finance the deficit, projected to amount to $31 billion. The assumed debt level presents no worries whatsoever.

Saudi Arabia prepared the 2015 budget with expenditures of $230 billion and revenues of $191 billion, leaving a projected deficit of $39 billion. However, it is widely expected that the shortage could end up being higher on the back of developments in the oil market and thereby on revenues, coupled with a steady rise in expenditure.

Stronger spending is partly meant to finance the ongoing war in Yemen. The budget for fiscal year 2015 was prepared before the break out of hostilities.

Moreover, the stock market is not doing fine, clearly reflecting investor worries. Reports suggest the Saudi bourse suffered losses of $119 billion in the first 25 days of August alone. The sizeable figure represents nearly two-thirds of losses sustained by the stock markets in the Gulf.

The loss, the worst in seven years, is substantial by representing around 52 per cent of total projected spending for the current fiscal year. In reality, the bourse was experiencing troubles before the recent global downturn, with the Tadawul All-Share Index conceding 4.5 per cent of its value in the first half of 2015.

The IMF projects a real GDP growth of 2.8 per cent in 2015, down from last year’s 3.5 per cent. The kingdom needs stronger growth to deal with challenges like joblessness. A report issued by the World Economic Forum puts the jobless rate in Saudi Arabia at 5.6 per cent. However, the worrying matter relates to unemployment levels among the youth, in turn put at 27.8 per cent, the worst within the Gulf.

Satisfyingly, it is fair to claim that Saudi Arabia has the flexibility to deal with the challenges thanks to its low outstanding debt and strong asset base.

Gulfnews