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Saudi Arabia reins in spending as it puts faith in reform

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Via Financial Times

Saudi Arabia is reining in government spending for the first time in three years in a bold calculation that Crown Prince Mohammed bin Salman’s economic reforms are paying off. 

At the same time, businesses have been been hurt by government measures that have raised their costs and battered investor confidence as Prince Mohammed has tried to overhaul the Middle East’s biggest economy.

But Mohammed al-Jadaan, the finance minister, insisted that “sentiment was turning positive” as he announced in his pre-budget statement that government expenditure for 2020 would be reduced to SR1.02tn ($320bn) from an estimated SR1.05tn this year. It would fall progressively to SR955bn in 2022, he added. 

“In 2020, we still start reaping the benefits of the policies, whether it’s fiscal or economic policies, that we have implemented over the past few years,” Mr Jadaan said. “I’m very confident that the adjustment to spending will not have an impact on economic growth.” 

Government spending, funded by petrodollars, traditionally triggers growth in the world’s top oil exporter. The IMF this month revised down its forecast for gross domestic product growth for the year from 1.9 per cent to 0.2 per cent, mainly because of cuts to the kingdom’s crude output. 

“There still remain risks for these fiscal targets: the weakness in the oil market, as well as the time required to complete [government] megaprojects and for those to support growth or non-oil revenue,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. 

Some Saudi businessmen are cautiously talking about an uptick in domestic activity with non-oil growth rising to 2.9 per cent year on year in the second quarter, its highest level in four years. Any recovery, however, remains fragile, bankers warned. 

“We are finally back at 2014, which was a good year for domestic sales,” said an executive at a big Saudi industrial supplier. “But that has been after many years of lost growth and the recovery is weak.” 

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Others are less convinced, saying the private sector has yet to experience the benefits of the past three expansionary budgets. 

“Business owners are chafing under what seems to be a lack of government spending and on top of that [the government is not] paying bills . . . it’s better, but it’s still not good,” said another Saudi executive. “We’ve not seen a palpable pick-up in economic activity. People are looking at the horizon and seeing mirages of green shoots.” 

He said companies were still suffering from the introduction of fees levied on employers of foreign workers, who account for up to 90 per cent of the private sector labour force, and moves by the government to force the retail and services firms to employ more Saudis. 

The government did recently waive the expatriate worker tariffs for the manufacturing sector — which employs about 645,000 foreigners — for five years in an apparent concession to industry. And Riyadh is hoping that nascent sectors, such as entertainment and tourism which have emerged as a result of social reforms, will become new drivers of growth. 

But business confidence has not fully recovered from Prince Mohammed’s 2017 anti-corruption purge that led to more than 300 tycoons and princes being detained at the Ritz-Carlton. Many had to transfer assets and cash to the government before they could secure their release. 

Partly because of the purge some businessmen are still looking to move assets offshore, “which is slowing down investment in the domestic economy”, said the Saudi executive. 

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Foreign investment has been stymied by the murder of Jamal Khashoggi, the veteran journalist, a year ago. There are also concerns about the kingdom’s role in the war in the Yemen and regional tensions with Iran. Those worries were underlined in September when Tehran was blamed for an attack at the heart of Saudi Arabia’s oil industry. 

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Foreign direct investment increased to $3.2bn last year from a low of $1.4bn in 2017, according to UN figures. But that is still less than half what the kingdom attracted in 2016, the year Prince Mohammed launched his Vision 2030 reform plan. 

In contrast, outward investment from the kingdom trebled from 2017 to 2018 to $21.2bn, a reflection of spending by state entities, notably the Public Investment Fund, as well as large private investors. 

The PIF, the powerful sovereign wealth fund, has been tasked with acquiring overseas assets overseas, while spearheading the development of megaprojects and the establishment of new Saudi industries. The fund, which is chaired by Prince Mohammed, will be the beneficiary of the proceeds of the initial public offering of Saudi Aramco, the state oil company, which could be launched as early as next week after several delays. 

If the listing goes ahead, it could raise up to $60bn to boost the coffers of the PIF, which faces huge financial commitments to meet its domestic goals. But PIF-led domestic projects are in their infancy and have yet to filter through to the private sector, and executives complain that the fund is crowding out businesses. 

“The private sector still feels squeezed — it has psychologically adapted to the new environment, but they are not lining up to invest — profits are still subdued,” a Saudi-based banker said. “There still isn’t the growth to create the jobs needed.”

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