Plunging oil prices may be perceived as a boon to consumers, but they are destructive to national economies relying on crude oil as their primary export. One such country is Saudi Arabia. With oil prices plunging into the mid-$20 range earlier in 2016, and now hovering around $50 per barrel, Saudi Arabia is reeling. The OPEC leader is desperately trying to balance the budget with falling oil revenues, amid a supply glut and fierce competition with WTI crude oil producers. In 2015, oil price weakness led to a budget deficit of 15% of GDP. This has resulted in sharply reduced earnings by public servants, a notable reduction in energy subsidies, and payment delays across the board. Perhaps the most concerning aspect of the Saudi Arabian economic growth cycle is the anaemic growth rate of the non-oil sectors. At just 0.3% for 2016, the head of the IMF in the Middle East acknowledges that this is barely positive.

Essential to Expand the Non-Oil Sectors of the Saudi Economy

For 2017, the growth in the non-oil sectors will improve, alongside that of the oil sectors. Thanks to a consolidation in oil prices, overall revenues have increased. Saudi Arabia has been hard at work attempting to cut expenditures by way of austerity measures. In 2017, the International Monetary Fund is anticipating a 2.6% expansion of non-oil GDP. The average annual non-oil GDP expansion between 2009 – 2013 was 7.4%. The IMF forecast of Saudi Arabia’s 2017 economic performance does not take into account several important measures. These include a 20% cut in ministers’ salaries in October 2016 for the next Islamic year, and a moratorium on all state employee bonuses. These austerity measures will likely lead to a further contraction in economic growth prospects for the Saudi Arabian economy.

Massive Turbulence Rocks Saudi Arabian Economy

The Saudis are quickly awakening to the reality that oil dependence is a dangerous prospect. The kingdom is attempting to rapidly diversify into the non-oil sector by creating massive funds for investment overseas. Its primary objective is to generate $100 billion in non-oil revenues within the next 3 – 4 years. Saudi Arabia will also be utilising VAT (value added tax) to balance out the budget. The transformation in the Saudi Arabian economy is difficult and disruptive, but it is essential that it continues over the next 5 years. The Saudis have been working hard to reduce their reliance on the price of crude oil. In 2016, the budget will be balanced with a price of $79.70 per barrel, sharply lower than the $92.90 per barrel last year. On Wednesday, 19 October 2016, Brent crude oil was trading at $52.80 per barrel. The US benchmark – WTI crude oil is currently trading at $51.11 per barrel on the Nymex. In 2016, the budget deficit is 13% of GDP, but for next year, the International Monetary Fund anticipates a budget deficit of just 9.5% of GDP.

Saudi Economic Indicators

•        The GDP growth rate in Saudi Arabia is currently 1.5%, down from the 1.8% in the prior reading.
•        The inflation rate is 3.3%, down from the 3.8% in the previous reading.
•        The current unemployment rate has held steady at 5.6%.
•        The government debt to GDP ratio is now 5.9%, sharply up from the previous figure of 1.6%.
•        Saudi Arabian manufacturing PMI dropped marginally from 56.6 to 55.3.
•        The consumer confidence level is 104 and the business confidence level is sharply improved at 3 from the previous reading of -12.