Dreams of mega-projects such as Neom – a huge new city on the coast of the Red Sea, intended to draw tourists from around the world – lie in tatters.
And Vision 2030 – the grand dream to modernise the economy and wean Saudi off its dependency on oil – that MBS hoped would be his crowning achievement, looks all but dead.
“I think Vision 2030 is more or less over,” says Michael Stephens, a Middle East analyst at the Royal United Services Institute in London. “I think it’s finished.”
The kingdom, he said, was facing “the hardest time it’s been through, certainly the most difficult period of Mohammed bin Salman’s tenure”.
Last week, Saudi Arabia introduced a raft of tough austerity measures in response to the economic devastation wrought by COVID-19. The government said it would effectively triple the country’s VAT on goods and services overnight to 15 per cent, while gutting benefits programmes for state workers and placing other benefits paid to Saudi nationals under review.
“We are facing a crisis the world has never seen the likes of in modern history,” Mohammed al-Jadaan, the country’s finance minister, said in a statement last week. He noted that, as tough as the country’s new austerity measures were, they were also “necessary and beneficial to maintain comprehensive financial and economic stability”.
The government estimates that these measures will narrow the budget deficit by around SAR100 billion ($41.5 billion), 3.4 per cent of GDP.
While that is by no means going to push the budget back into balance, says Jason Tuvey, a senior emerging markets economist at Capital Economics, it will help to partially offset the worsening of the deficit caused by lower oil revenues.
Karen Young, a Middle East expert and resident scholar at the American Enterprise Institute, says that such measures are intended to get a handle on the country’s public spending. She says: “Austerity in the Saudi sense means moving to a fiscal policy that is sustainable: cutting public expenditure on large construction projects and social services, including the provision of healthcare and utilities, and attempting to scale down the public sector wage bill.
“This had to happen at some point. The twin crises of COVID-19 and oil price collapse have hurried it along.”
In March, the kingdom projected its budget deficit for 2020 was expected to widen to $US61 billion ($95 billion), or nearly 8 per cent of GDP, in light of the oil price collapses.
We are facing a crisis the world has never seen the likes of in modern history,
Saudi Arabia’s finance minister Mohammed al-Jadaan
Around 70 per cent of the kingdom’s employed population work for the government, and much of the private sector relies on government contracts, meaning that any impact on state revenues can have huge implications for the wider economy.
Much of the country’s current malaise lies in its ill-advised oil price war with Russia in March. Both countries ramped up oil production after a mutual agreement fell apart.
This coincided with a sudden and devastating blow to demand, triggered by the global restrictions on travel and manufacturing. Brent crude lost more than half of its value in under a month as a result, severely undermining Saudi Arabia’s fiscal position.
Despite a compromise being reached between the two countries, global lockdown measures have meant demand for oil has remained reduced, keeping the price of crude depressed.
The effects of coronavirus on Saudi’s economy could be further exacerbated by a bleak financial outlook globally.
“The fiscal situation looks daunting and this could lead to a rapid decline in the [Saudi] fiscal balance and underscore the missed opportunities to diversify over the last 20 years,” says one senior Gulf banking source. “Oil ain’t going back to $US80. Ever.”
But the country doesn’t face a financial crisis in the traditional sense, says Young.
“It is more a crisis of the Saudi economic model, in which the state generates most economic activity in the country, fuelled by oil revenue,” she says. “The private sector has always been weak in Saudi Arabia, and now it is feeble as consumption drops.”
Another key issue in this crisis is the dollar peg that Saudi Arabia has maintained for decades, weathering storm after storm. With oil and gas priced in dollars, linking local currencies to the greenback has helped shield the Gulf countries through the worst episodes of energy market volatility, while allowing central banks to accumulate robust foreign reserves.
But this has its downsides too. When the price of oil crashed in March, more than $US27bn was wiped off Saudi Arabia’s foreign exchange reserves, a decline of more than 5 per cent.
Now, speculators are mounting challenges against the kingdom’s dollar peg, similar to the Asian currency crisis of the late Nineties that forced countries such as South Korea and Thailand to abandon their pegs.
The Saudi riyal is now trading at its weakest level against the dollar on the spot market since the global financial crisis.
Austerity measures, says Tuvey, should help to ease fears of a devaluation of the riyal: “We had argued the authorities were more likely to go down the route of fiscal consolidation in order to make the adjustment to low oil prices rather than abandon the long-standing dollar peg.”
For the young, hot-headed MBS, who has spent much of his time as crown prince preoccupied with acquiring trophy assets in the west and waging a gruesome and expensive war in Yemen, the speed with which the kingdom will now be forced to modernise might prove too much, analysts and experts predict.
But with the country’s new tax regime and austerity measures, they say MBS has gone some way to biting the bullet and instigating long-overdue change.