- Reuters/POOL New
Saudi Arabia announced several fiscal consolidation measures on Tuesdayin an effort to help reduce the kingdom’s record budget deficit as it contends with lower-for-longer oil prices and costly regional conflicts.
Chief among them, according to Bloomberg:
- Ministers’ salaries will be shaved down by 20% Salaries of the members of the Shura Council, which advises the monarchy, will be cut by 15%. And bonus payments will be canceled for state employees.
“It’s one more economic measure to balance spending. Of course people don’t like it, but it’s a sign of the times,” Saudi analyst and editor of Al Arab News Jamal Khashoggi told Reuters after the kingdom’s announcement.
“Probably the teachers and many others will be affected by it. It shows why it’s important for the private sector and Saudi GDP to diversify.”
In light of these measures, the Saudis’ budget deficit should narrow more quickly than previously expected, argued a BMI Research team in a note to clients.
However, given that about two-thirds of working Saudis are employed by the public sector, this decision also comes with implications for Saudi consumption and could increase political risk.
Regarding the first point, the reforms will reduce the purchasing power of households, which could then pull down private consumption, according to BMI. (In basic English: if you have less money today, you can’t buy as much as yesterday.)
“This will weaken non-oil GDP growth, which was already negative in Q415 and Q116,” the team argued.
“Overall headline growth could still remain positive over the coming quarters, on the back of rapid expansion in hydrocarbon production, but we believe that the risk of seeing the Saudi Arabian economy dipping into recession has increased significantly.”
Taking that a step further, this could increase the country’s political risk over the short-term as Saudi citizens have to start tightening their belts.
Again, as the BMI team explained:
“For decades, the country’s social contract has been built upon a tacit agreement between the al-Saud royal family and the Saudi population, which strips the latter from political representation in exchange for redistribution of the oil wealth from the former. […] By removing some of these benefits, the royal family, through its government, is redefining the country’s social contract. We therefore expect to see the Saudi population becoming more assertive in its political demands over the coming quarters, with the government and the royal family coming under increasing scrutiny.”