Saudi slump threatens pace of reform

However, data released during the conference showed the private sector, which the reform programme assumes will create hundreds of thousands of jobs and play a much bigger role in the economy in the next decade, is struggling. A survey of selected companies’ found that growth in private business activity in April slowed to its lowest since the research first began in August 2009. New orders were down for the first time in the survey’s history, suggesting there is little new business on the way.

Bank lending to the private sector  in March was down for the 13th straight month, according to Central Bank data. Although banks are awash with funds, private firms see little point in borrowing to invest.

Car sales fell by an estimated 24 per cent in 2017. Estimates for this year have not yet been published but businessmen said they had seen little or no pick-up in sales, despite hopes that the lifting of a ban on women driving, expected to take effect in coming months, would trigger a mini-boom.

The rising fees for foreign workers can make it uneconomic in some cases to keep employing foreigners — even though it can be difficult to find trained Saudis to replace them

The main problem, businessmen say, is part of the reform programme itself: austerity measures designed to cut the budget deficit, including 5 per cent value-added tax imposed in January, higher domestic fuel prices, and rising fees which companies must pay to hire foreign workers.

“The reforms were supposed to help the private sector but in the short term at least, theh have had the opposite effect,” said one frustrated Saudi businessman who, like others, declined to be quoted publicly for fear of appearing to oppose the reforms.

Many businessmen said the rising fees for foreign workers were the biggest single burden on them, making it uneconomic in some cases to keep employing foreigners — even though it can be hard or impossible to find trained Saudis to replace them. The fees are encouraging an exodus of foreigners from Saudi Arabia, having the knock on effect of reducing consumer demand. The number of foreigners employed in the kingdom dropped by over 277,000 to 10.42 million between the third and fourth quarters of last year, according to official data. “It wouldn’t be surprising if the number decreased by a million in 12 months,” said a top executive at a big Saudi company in the retail industry.

At the end of last year, the government said it would spend more to support the economy and relax its austerity drive, aiming to balance its budget by 2023 instead of 2020. But while authorities are launching a string of development projects – such as a multi-billion dollar resort area near Riyadh, for which ground-breaking occurred on Saturday – little money seems to be reaching the private sector so far. Some firms complain the government is several months late paying its bills to them.

The spending power of 70 per cent of Saudi households is fully shielded from the austerity steps by a government scheme of cash compensations

In private, one Saudi official worried the austerity component of the reforms might still be too strong compared to the growth component. “The fiscal reforms have succeeded, but in the long run it’s counter-productive if you stifle the private sector,” he said.

Mazen al-Sudairi, head of research at Al Rajhi Capital, said recent data was positive in some ways. He noted that while unemployment among Saudi citizens was almost 13 per cent, over 100,000 Saudis obtained jobs in the fourth quarter, suggesting Saudis were moving into some of the jobs vacated by foreigners.

Al Rajhi calculations show the spending power of 70 per cent of Saudi households is fully shielded from the austerity steps by a government scheme of cash handouts to compensate them. That implies most of the slump in consumer spending is due to the exodus of foreigners and their falling real incomes – a result which may be acceptable to the government as it manages the tricky domestic politics of the reform programme.

This edited article, with input from Reuters new agency, was published in Gulf Business

 

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