Huge challenges ahead for Saudi's crown prince

International Monetary Fund has advised KSA to ease the austerity measures
By Bloomberg
Sat 01 Jul 2017 01:14 PM

Saudi Arabia’s economy shrank by 0.5 percent in the first quarter, illustrating the scale of the challenge facing the country’s new heir as he overhauls an economy still reliant on a struggling oil industry.

Gross domestic product was 643 billion riyals ($170 billion) compared with 646.4 billion riyals in the same quarter a year earlier, the General Authority for Statistics said in a report on its website on Friday, using preliminary data based on 2010 constant prices. The oil and gas sector shrank 2.4 percent. The economy expanded 10.1 percent at current prices.

The data shows the difficulty facing Saudi Arabia as it implements its long-term plan to wean the economy off oil. Led by Crown Prince Mohammed bin Salman, who was named heir to the throne in an abrupt move last week, the government is trying to balance that shift with austerity measures to balance the budget -- but which have weighed on growth. It has also cut oil production as part of an OPEC drive to tackle a global surplus.

“The contraction is likely to deepen over the rest of year and, while the economy should return to growth by next year, the pace of growth is likely to be weaker than most expect,”  Jason Tuvey, London-based Middle East economist at Capital Economics, said in a research report. It was Saudi Arabia’s first outright contraction since the global financial crisis, he said.

The International Monetary Fund expects Saudi economic growth to slow to 0.4 percent this year, the least since 2009. Saudi authorities have said they expect overall growth to exceed 1 percent in 2017.

Saudi Arabia, the biggest producer in OPEC, led the group’s decision in May to extend output cuts through March 2018 to counter the crude glut. Lower production has come on top of the plunge in oil prices over the past three years, creating a budget deficit that led the government to tap bond markets.

It also triggered Prince Mohammed’s so-called Vision 2030 plan. Launched while he was still deputy crown prince, the plan's aim is to boost the non-oil economy, sell a stake of less than 5 percent of state-run oil giant Aramco and create the world’s largest sovereign wealth fund.

The overhaul has also included austerity measures, such as subsidy cuts and slashing spending, which combined with the drop in oil prices to slow the economy. In May, the International Monetary Fund advised Saudi Arabia to ease the austerity measures, even if it meant not meeting the country’s self-imposed target of balancing the budget by 2019.

In a sign of how sensitive the austerity policy became, King Salman last week reversed cuts to state salaries and bonuses -- at the same time as Prince Mohammed, 31, was named the kingdom's new heir. The government also gave public employees an additional week’s holiday to mark the end of Ramadan.

Markets responded positively to Prince Mohammed’s promotion, viewing it as solidifying the country’s commitment to the Vision 2030 plan. Some conservative Saudis are unhappy with its call for a “vibrant society” with more female workers, sports clubs and entertainment.

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