Saudi Arabia could see more instability if oil doesn't get back up to $60

Reuters/POOL New

With the OPEC production deal holding, at least for the moment, questions have now arisen over how prospects look for the cartel’s biggest producer. It’s been a strange few years for the Kingdom of Saudi Arabia, as its endured budget deficits for the first time in its modern history, stagnation in oil prices and rising competition from other OPEC members and the American shale boom. Recently, talk has centered on the Saudi monarchy’s glimpse of the future: the Vision 2030 plan, whereby it hopes to diversify its economy and end its dependence on the mercurial oil and gas market. But can the world’s biggest oil producer and OPEC’s de facto leader pull it off?

In the short term, Riyadh will continue to feel the pain of lower-than-normal oil prices. The growth outlook for Saudi Arabia has been slashed, as the International Monetary Fund (IMF) announced on January 16 that the world’s largest oil producer would see its GDP grow by only 0.4 percent in 2017. The estimate comes on the basis of the continued low price of oil, but more importantly on the country’s slashed oil production: as a result of the recent OPEC production deal, Saudi Arabia has agreed to keep its production level at or below 10 million bpd. This has resulted in a cut in its growth outlook, down from 2 percent in October, according to Bloomberg.

This comes after anemic growth in 2016, where GDP expanded by only 1.4 percent. If oil prices stabilize, and the country’s economic forecast improves, GDP will likely expand by 2.3 percent in 2018.

The official Saudi response decried the IMF’s results as overly conservative. A government spokesman declared that Saudi growth would be “north of 1 percent,” citing the anticipated investment in renewable energy and a stimulus packaged the Saudi government was planning for the private sector, according to Bloomberg.

The Saudi leadership had been pivotal in the campaign to bring about an OPEC cut, after resisting production deals for years. The stakes were raised this year, as draining cash reserves and a resistant American energy sector convinced Riyadh that cuts were needed to boost prices. The cuts have come, surprising many analysts, and the OPEC deal looks set to hold at least for the time being.

Along with the cuts to production, the Saudi government looks to cut spending. The 2017 budget, the most detailed in the country’s history, lays out a series of measures for stabilizing state finances, which plunged into deficit in 2016 as a result of the crash in prices. The state is the largest employer and spender in the Saudi economy, which is largely built on the oil and gas industry. Cuts to construction projects and social programs, estimated at around $20 billion, will help to balance the budget. The deficit in 2016 was around 12.6 percent, down from 2015’s budget deficit of 15 percent, and if prices stay where the Saudis expect them to, between $50 and $43 per barrel, the budget gap in 2017 will be smaller still. The official Saudi estimate has the deficit amounting to 7.7 percent of GDP in 2017.

The current fiscal forecast is based on the National Transformation program (NTP) which aims at a balanced budget by 2020. The plan, also known as Vision 2030, was announced in 2016 and is intended to diversify the Saudi economy away from petroleum. The largest single component in the Saudi economic sector, the massive state energy company Saudi Aramco, is to be privatized, and its assets used to develop the country’s manufacturing, tourism and other sectors.

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