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Sat 12 Dec 2015 01:01 AM

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Saudi Arabia 'needs to act now to address economic woes'

New report by McKinsey & Co says Gulf kingdom cannot wait for oil prices to recover to give economic stimulus

Saudi Arabia 'needs to act now to address economic woes'

Saudi Arabia can’t afford to wait for oil prices to recover and needs to accelerate economic measures to avoid rising unemployment, deficits and debt, McKinsey & Co has said in a new report.

The country requires public and private investments of as much as $4 trillion as part of a strategy to boost productivity and create jobs, the report said. Based on current trends, Saudi Arabia “could face a rapid economic deterioration over the next 15 years.” Even a public spending freeze and halt to hiring foreign workers would still leave the country facing falling household incomes, rising unemployment and weakening finances.

“This is a call to dramatically accelerate reforms which ultimately will provide a more sustainable future,” Jonathan Woetzel, a McKinsey Global Institute director and main author of the report said by phone. “Waiting for the world to get better is not an option.”

A slump in crude prices, the government’s main source of revenue, is pushing the world’s biggest oil exporter into its first deficit since 2009 and its foreign reserves to a three year low. The International Monetary Fund predicts that Saudi’s savings, $640 billion at the end of October, would run out after five-years under current spending policies. In response, the government is planning to cut spending on infrastructure projects, and tapping debt markets to fund the deficit.

The bulk of the $4 trillion in investments needed would come from the private sector and should focus on mining and metals, petrochemicals, manufacturing, retail, tourism, healthcare, finance and construction, according to McKinsey. If this level of investment were achieved the country could double the size of its economy and create six million new jobs by 2030.

Failure to make progress on productivity-boosting measures would lead to the government’s finances “deteriorating sharply,” according to the report. Reserves would drop and public debt could reach as much as 140 percent of GDP.

“Even freezing spending would still mean burning through its reserves at a rapid pace and lead to the a decline in average incomes,” Woetzel said.

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