Saudi’s headlines keep rolling in.
Saudi Arabia is deepening its ties with Russia, with billions of investments planned for the future. Saudi Arabia is going to allow women to drive. Saudi Arabia booked a second quarterly GDP contraction in a row, with non-oil revenues particularly worrying. Saudi Arabia is also going ahead with the Aramco listing in the second half of 2017, despite reports of a possible delay.
The Kingdom has certainly been making a lot of headlines recently and so have analysts from various institutions, either praising the effect that the OPEC/Russia oil output cut agreement is having on prices, or warning the cartel and its de facto leader that they should change their strategy.
Now a new warning has come from the global head of sovereign ratings at Fitch, James McCormack.
When countries “kick-start reform programs when oil prices are low, sometimes the enthusiasm wanes when commodity prices move higher. That is potentially a risk here. It will take continued focus on discipline to maintain many of those initiatives with higher oil prices,” McCormack told media in Riyadh.
That’s more a reminder than a new threat. There have been rare voices wondering if the Saudis will resist the siren song of higher oil prices and maintain the discipline necessary to really implement the ambitious diversification program, which, is not the first of its kind. There was an older one called Vision 2024, which somehow got shelved amid…. well, higher oil prices.
Judging by the current economic situation in the Kingdom, there is ground for doubts.
The latest GDP figures revealed a 1.03-percent GDP contraction on an annual basis in the second quarter of the year, following a 0.5-percent shrinking in the first quarter of the year. What’s more worrying, however, is that while oil revenues contracted, by 1.8 percent, which was to be expected, non-oil revenues grew only moderately, by 0.6 percent. This clearly means that the Saudi economy has a very long way to go before non-oil industries can offset the revenues that oil generates.
Another worrying sign came earlier this year, when the government in Riyadh decided to roll back some austerity measures concerning the salaries and bonuses of public servants. The decision came on the back of recovering oil prices, when OPEC and Russia decided to extend their production cut agreement. This rollback suggested that the Saudis might find it hard to resist another temptation of the same kind: it’s all too easy for Saudi Arabia to keep going in the rut dug over decades than it is to venture into a new direction and start from scratch.
True, Saudi Arabia has announced renewable power tenders as part of its move away from oil, and just yesterday it struck an arms production deal with Russia, in addition to expanding its global footprint in petrochemicals with billions in investments. But that won’t be enough—it’s only the start. The main work will need the billions expected from Aramco’s IPO. And for this IPO to bring in these billions, crude oil prices need to remain higher.
The situation of Saudi Arabia now is kind of similar to a junkie trying to kick a habit, but needing money to do it – money that can only come from the sale of drugs to other junkies.
Oil is, after all, as Chicago so aptly put it, a hard habit to break. There is the constant temptation of slipping back into the old habit, and too often it proves too strong. One can only hope that the decision-makers in Riyadh are hearing what McCormack, Goldman Sachs’ Lloyd Blankfein and others are saying.