Report: Saudi transformation threatened by fiscal strain

The economic growth of Saudi Arabia is hanging on a balance, concludes a new report in the Financial Times. The Kingdom is offering investors’ untapped growth as it embarks on a period of immense change. However, economic realities threaten to derail Crown Prince Mohamed Bin Salman’s grand vision to move away from oil.

The de facto Saudi ruler needs capital inflows to assist his reform programme, investing in sectors such as mining, retail and manufacturing. He seeks to tackle rampant youth unemployment while ushering more women into the workforce. The change, according to experts cited in the report, is “breath-taking” in scope.

Equally daunting are the challenges facing the Saudi regime. “Lost in the optimistic noise are the considerable fiscal difficulties that remain across the Gulf, along with bureaucratic challenges, deteriorating credit standings and rising interest rates,” Tarek Fadlallah, chief executive of Nomura Asset Management Middle East, told the FT.

The Saudi economy felt the full force of the global financial crises. According to the report, since the oil price crash of 2014, the Kingdom slipped into a recession last year. Most concerning for Bin Salman, who recently returned from a month-long charm offensive in the US, foreign direct investment in the Kingdom fell to $7.5 billion in 2016 from $8.1 billion in 2015, well below the $18.2 billion average before the global financial crisis.

Deep austerity measures were introduced by the Saudi royals in an effort to improve fiscal stability, “however private sector confidence has taken a further knock with the incarceration of dozens of prominent businessmen in the crown prince’s anti-corruption drive”, the report says.

Read: The Saudi purge looks like an own goal by Mohammad Bin Salman

One of the major problems cited in the report is the “Saudisation” of the economy. The policy seeks to increase quota requirements for the employment of nationals. The demand, according to the report, is a major concern for foreign investors. Equally, the perception amongst Saudis, who regard hospitality as an unbecoming career, preferring to work for the state or the energy industry, threatens to undermine the private sector-led recovery.

“If the government is hoping to achieve a vision of travel and tourism to create a chunk of growth, then it has to change this perception among the youth,” says Alex Kyriakidis, Marriott International’s managing director for the Middle East and Africa, who oversees hotel brands including the Ritz-Carlton.

Despite these concerns, global hotel brands like Marriott are taking steps to grow their business in the Kingdom. Further growth is predicted with the opening of the Tadawul stock exchange in Riyadh to foreign investors. New reforms have also been introduced to bring it in line with international norms. These reforms could potentially see $40 billion in emerging market funds flowing into Saudi in the coming years.