Improving oil prices narrowed Saudi Arabia’s budget deficit from 12.8 percent last year to 8.9 percent this year, and now Riyadh is expected to announce an increase in spending for 2018, Bloomberg reports.
Still, the Saudi economy has still not fully recovered, and GDP this year is forecast to fall by 0.5 percent, according to a Bloomberg poll among 14 analysts. That’s why the 2018 budget will include measures for economic expansion as well as steps aimed to offset the negative impact of austerity measures including lower fuel and electricity subsidies and taxes, including VAT.
The next year will be a very important one for Riyadh, with the initial public offering of the state oil company, Aramco, slated for the second half of 2018, when Saudi Arabia expects the global oil market to have returned to balance. Despite doubts surrounding the offering, official sources are unwavering in their insistence that everything is going as planned.
Aramco recently announced a surprising revision of its spending plans for the next ten years, raising its annual budget by 25% from last year’s plan, to some US$40 billion, or a total of US$414 billion for the period until 2027. A big part of the total will serve to maintain Aramco’s production capacity at the current 12 million bpd—the largest production capacity globally. Related: U.S. Solar Nearly Doubles Output In 2017
Meanwhile, however, the government—notably Crown Prince Mohammed—is moving forward with his Vision 2030 plan that should see the Saudi economy diversify away from its principal export commodity, and which depends on the success of the Aramco IPO.
Among the latest projects announced under the Vision 2030 plan is the Neom megacity that should turn Saudi Arabia into a tourist destination—the Kingdom is preparing to start issuing tourist visas for the first time in its history. Neom, according to Prince Mohammed, should contribute at least US$100 billion to Saudi GDP annually by 2030.
By Irina Slav for Oilprice.com
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The narrowing of Saudi budget deficit in 2017 was mostly due to cutting government expenditure drastically and partly rising oil prices of recent time. Saudi Arabia’s vision 2030 has little chance of success without two major elements: diversification of the economy without a minute’s delay and an oil price at $70/barrel or higher in 2018.
Saudi Arabia badly needs an oil price higher than $70/barrel for a successful Initial Public Offering (IPO) of 5% of Saudi Aramco and also to replenish its dwindling financial reserves.
At a $40-barrel price, the IPO will be a complete failure and vision 2030 is guaranteed to fail.
At $75 or better at $100 – the Prince will wield the economic power he needs to secure his ascendency to the Saudi throne.
It is starting to look as if the future of Prince Mohammed bin Sultan and his Vision 2030 are intrinsically linked to a high oil price. It couldn’t therefore have been lost on Prince Mohammed that in this current global oil geopolitics, Russia’s Putin is, in effect, calling all the shots.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London