IMF tells Saudi Arabia: ‘You’re well on track, no need to go so fast’

It is not often you hear the International Monetary Fund (IMF) urging “spend, spend,” while the client country replies “well, actually we’d rather hold on to the money for a while, if it’s all the same to you.” But something like that seems to have happened during the IMF’s recent country visit to Saudi Arabia. The IMF has a well-deserved reputation as an austerity merchant and usually seeks to impose a rigid regime of fiscal control. “Cut spending, increase taxes,” is the ritual formula.Saudi Arabia is not in the same league as countries that have to go begging to the IMF. It has no need to borrow money from the fund, because it is sitting on some $470 billion of reserves from the years when oil was $100-plus per barrel. There is no risk of Saudi Arabia going bust any time soon. But it is in a fiscal fix. Because of the halving of oil prices, there has been a budget deficit for the past two years, a rare enough occurrence in Saudi economic history to warrant serious action.The government’s response has indeed been radical. Scrapping public sector perks, cutting subsidies on fuel and utilities, and imposing taxes, excise duties and levies were drastic measures in a country with a low tax regime, high government employment and big subsidies on essentials. The accompanying strategy to reduce oil dependency and public sector economic domination were truly transformational. The Vision 2030 strategy and the National Transformation Program (NTP) 2020 envisaged balancing the budget by 2019 and minimizing oil’s contribution to the economy a year later, as part of a massive privatization program. There has been some dilution of these plans — witness the reinstatement of some public sector benefits and the emergence of NTP 2.0 recently — but evidently the measures are still sufficiently drastic for the IMF to warn that economic growth, forecast as negligible this year and only 1.1 percent in 2018, was at further risk if the country continued to press its foot firmly on the brake. “Most directors noted that Saudi Arabia has the fiscal space to allow a more gradual consolidation than envisaged in the fiscal balance program,” was the IMF-speak take on it. The message was, “you don’t have to be quite so tough, so soon.” The IMF said: “The authorities were not convinced, believing that a relatively fast pace of price increases would minimize implementation risks.” In other words, Saudi policymakers thought about it, but were actually quite happy to keep the brake pedal on the floor for the time being. So, while that is a reversal of the usual IMFclient role, it is actually quite a healthy scenario for Saudi Arabia. The Kingdom has the flexibility to ease off if the austerity gets too severe, or if global and regional conditions make it necessary. Maybe it has more leeway than it currently realizes. The shrewd analysts at Emirates NBD Asset Management in Dubai reckon that it can cover the deficit next year with a mixture of reduced subsidies and increased levies, even allowing for expensive items like the Citizens’ Account measures to help the Kingdom’s less wealthy. They also think that Saudi Arabia’s creditworthiness is such that any shortfall in the public account can be quite easily made up in the international debt markets. The Kingdom tapped the bond markets for $39 billion in the past year, but its debt-to-GDP (gross domestic product) ratio is still only 12 percent, much healthier than other A-rated sovereigns. The IMF does make a cogent point, however, when it explains that the multiplier effect of capital spending is bigger than current spending, meaning that Saudi policymakers would be better advised to direct investment to big infrastructure projects rather than day-to-day expenditure like public sector pay or subsidies. Again, the IMF is advising the Kingdom to spend big. The other potential game-changing event on the Saudi financial horizon is the further opening up of financial markets with inclusion in the two global indices — the MSCI and the FTSE Russell — that have so far eluded them. Both could come next year, and would mean an immediate jump in the quantity of foreign direct investment (FDI) in the country, as global investors scramble to get up to weight in Saudi assets. Other Arabian Gulf countries enjoyed a doubling of FDI once they were included in the big global indices. You might ask, if the financial scene is so potentially rosy, why bother at all with the program of state asset sales, which including potential $100 billion initial public offering (IPO) proceeds from Saudi Aramco, could eventually bring in $300 billion to the Kingdom’s coffers? The answer is that the Vision 2030 policy is designed to transform the economy and society of the Kingdom, by making its economy and workforce more productive and efficient, rather than just providing a short-term financial fix. It is transformational, rather than remedial. The IMF is saying to the Kingdom, “Don’t worry, you’re on track and you can afford to be less aggressive in economic and fiscal policy.” That is a good position to be in.

The Kingdom has the flexibility to ease off if the austerity gets too severe, or if global and regional conditions make it necessary. Frank Kane