Kingdom’s Economy Sputters, Austerity Plan Unveiled

Low oil prices are taking a heavy toll on Saudi Arabia’s economy, which is facing even greater austerity under deputy crown prince Mohammad bin Salman Al Saud’s plans to raise $100 billion a year from subsidy cuts and new levies.

The powerful prince also has plans for a $2 trillion investment fund to diversify the country’s investments.

Saudi Arabia’s economy slowed sharply at the start of this year as fiscal austerity squeezed the non-oil-related sector, which seems to be struggling, according to Capital Economics’ GDP tracker. The firm forecasts that GDP growth will slow to 1.5% this year and weaken further in 2017. Last year’s growth was 3.4%.

Meanwhile, Fitch Ratings cut Saudi Arabia’s sovereign debt rating in April to AA- from AA, citing the effects of low oil prices and political uncertainty. It said the concentration of policymaking in the hands of prince Mohammad, the 30-year-old son of king Salman bin Abdulaziz Al Saud, has added an element of un-predictability. The prince is second deputy prime minister, chairman of the Council on Economic and Development Affairs, and defense minister.

Prince Mohammad is leading the effort to privatize a range of industries, including the national oil company, Aramco. An initial public offering of less than 5% of Aramco’s parent company, most likely next year, could raise more than $100 billion. The IPO will set the value for the rest of the company, which will be the major initial holding of the new Public Investment Fund, making it the largest in the world.

The Capital Market Authority plans to raise governance and transparency standards to attract more foreign investment. A year after opening the stock market to direct investment by foreigners, they own less than 1% of the market. Beginning in April, the CMA required companies it regulates to publish financial information on their websites. The country will adopt international accounting standards next year, as part of efforts to ensure it is included in international indexes.