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Saudi Arabia re-affirms reformist stance

Economy and planning minister Muhammad Al Jasser, in a rare and wide-ranging interview with Euromoney, seeks to allay rising fears over the Saudi Arabian economy’s fiscal dependence on oil revenues while detailing his priorities for reform


Saudi Arabia will push ahead with labour market and economic diversification efforts, the country’s economy and planning minister has pledged, amid rising fears the Kingdom’s dependence on oil revenues has heaped on medium-term growth risks and rising indebtedness.

In a rare and wide-ranging interview with Euromoney in Riyadh, minister Muhammad Al Jasser sought to allay rising fears over the economy’s fiscal dependence on oil revenues while detailing his priorities for reform. “You could say that the absolute size of the government budget, which relies predominantly, if not totally, on oil revenues, is an indicator of greater dependence on high oil prices," he says. "But it is the relative terms that matter, and [spending as a proportion of oil revenue] hasn’t changed much over the years.”

The comments come amid rising fears the Kingdom needs to keep oil prices elevated to finance a jump in public spending, after Ali Naimi, Saudi Arabia’s veteran oil minister, in January shocked markets after saying the world’s largest oil producer aimed to keep oil prices at around $100 a barrel. The remarks broke with his previous tradition of declining to provide price targets, while the benchmark figure was higher than speculated – $70-80 per barrel (pb) – by market participants.

Saudi Arabia’s surge in public spending in recent years – hot on the heels of the Gulf-wide fiscal expansion as a response to successive Arab uprisings – has exacerbated the structural weakness of the Kingdom’s fiscal make-up and its oil price sensitivity. According to the International Monetary Fund, in 2011 the country needed an oil price of $80pb to balance the books, compared with $50pb in 2008 and just $25pb a decade ago, underscoring the government’s rapid growth as a provider of goods and services in the economy and its poorly diversified revenue base.

Although the market is relatively sanguine for now over the Kingdom’s debt dynamics given strong domestic banking liquidity and the economy’s huge reserves, with Saudi Arabian Monetary Agency’s (SAMA) reserves estimated to rise to $700 billion in 2013 from $568 billion at end-2011, some hawkish observers are sounding the alarm.

In July, for example, Jadwa Investment, a Saudi securities house, forecast substantial fiscal deficits from next decade onwards and cited the need for politically sensitive structural reforms. The investment house argued Saudi Arabian policymakers needed to be roused from their reformist slumber since the foundation of the economy was overly reliant upon state spending and waning oil exports.

However, Al Jasser, who was appointed in December, struck an upbeat tone. “In relative terms, non-oil GDP is increasing as a percentage of total GDP [72.5% in 2011 compared with 66.8% in 2001]," he says. "Also, our non-oil exports of goods – not services, just goods – as a percentage of our imports of goods, has risen to about 40% now. So, there is growth in non-oil exports, there is more diversification of the economy, and hence from that perspective, if anything, the economy is getting less dependent on oil exports.”

Reform push

 Saudi Arabia’s central bank governor, Mohammed Al Jasser
Muhammad Al Jasser
Economy and planning minister 
Al Jasser – credited with pursuing strong banking regulations during his 15-year tenure at the SAMA, latterly as governor – said the government was seeking to streamline the labour market process while investigating the possibility of a Gulf-wide VAT to “manage economic consumption and inflation with more tools in our hands”.

He adds: “There has been a level of awareness of the need to streamline the labour market, in the sense of paying more attention to creating job opportunities in the private sector for Saudis. This arises from the realization that there is a demographic window opening in the Saudi economy. Those between the ages of 15 and 64 represent about 61% of the population now."

He highlighted the need to improve labour productivity and increase female participation in the workforce. To this end, he pledged more flexible labour policies. “Making foreign labour, especially in the lower skilled areas, more expensive will incentivize Saudis to accept those types of jobs and compete for them, because the demand for foreign rather than Saudi labour might then be less," he says. "That could mean making visas less readily available, and also charging employers higher fees for hiring foreign instead of domestic labour."

Asked whether vested interests would derail oft-touted reforms – from the stock market liberalization to the introduction of the mortgage law – Al Jasser says: “I don’t think the process of reform has stalled, far from it. It is moving, but the pace of it, as I said, is an issue that people will agree to disagree on.”

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