Saudi Arabia Announces Cutbacks, Jeopardizing MBS’ Regional Sunni Supremacy

Saudi Arabia – the world’s largest oil exporter – is another country that is currently succumbing to the economic downturn caused by COVID-19. The kingdom, in which money seemingly has been almost no object for decades, needs to implement cutbacks as a result of the decreased oil price and Mohammad bin Salman’s (MBS) vision for his country is in jeopardy.

How Much Is Saudi Arabia Cutting Budgets?

Due to an oil price in freefall – the price of oil has halved within a few months- and the general global economic shockwave, Saudi Arabia has entered a crisis. According to the kingdom’s Minister of Finance Mohammed Al-Jadaan, Saudi Arabia has not experienced a crisis of this magnitude for several decades. The expected budget cuts of around one-fifth of government spending are thus significantly higher than the budget cuts expected before the crisis began. It was all the more critical that the necessary “hard measures” were now taken, which would be “long-lasting,” according to Al-Jadaan.

The COVID-19 impact on the global economy has exacerbated the issues the kingdom had been facing already. In the first quarter of 2020, Riyadh’s government revenue fell 22 per cent year-on-year to $ 51.2 billion and oil revenue decreased by 24 per cent to $ 34.4 billion.

GDP Decline

The billion-dollar stimulus package launched in April to combat the economic consequences of the COVID-19 crisis is projected to increase the budget deficit for the year as a whole, to $ 112.5 billion, which comprises 15.7 per cent of the country’s GDP. Meanwhile, the so-far shallow level of government debt is projected to rise to $ 227.7 billion by the end of 2020, just under a third of the country’s GDP. All while forecasts are calling for a GDP decline of 3.2 per cent.

The market, meanwhile, is paying close attention to these developments. Moody’s cut Saudi Arabia’s outlook from stable to negative, while maintaining its A1 rating – for now. The answer for the kingdom must, therefore, be given via fiscal adjustments, savings and new taxes, while potentially cutting wages by 40 per cent. The downside of the latter, high economic and socio-political consequences, are a potential steadily increasing inflation.

Already the increase in gasoline, electricity and water prices and the introduction of a five per cent value-added tax in early 2018 caused displeasure and then arrests of critics. Nevertheless, it appears to be a risk the kingdom needs to take, as even the country’s powerful corporations have also cut back their investments: Saudi Aramco, the world’s largest oil company, and Sabic have announced massive investment cuts for the foreseeable future.

What About Vision 2030?

Moreover, the country’s “Vision 2030” project has been put on hold. In the current climate, even Saudi Arabia cannot afford to continue MBS’ rebuilding program, worth hundreds of billions of dollars. Ironically, one aspect of the project has been to make the country less dependent on the oil price cycle.

Another issue for MBS lies in a geopolitical dilemma. Riyadh could be forced to end costly conflicts such as the war in neighbouring Yemen, where Sunni Saudi Arabia has been without real military success for years. Moreover, the economic blockade against the small neighbouring state of Qatar will reemerge as a topic to discuss, while the struggle for supremacy over the entire region with Saudi Arabia’s Shiite arch-rival Iran could also be influenced.

The latter in particular is a pressing issue for MBS, who has been trying to stop Iran from obtaining regional hegemony in the region for years. It will be interesting to see whether he dares to retreat from conflicts or whether Saudi Arabia’s geopolitical positions remain undaunted. Considering that Saudi Arabia’s main ally — the United States — faces a similar economic dilemma as the kingdom, however, Saudi Arabia’s focus could indeed change rather quickly, and as a result, change circumstances in the entire region for decades to come.