Suparna Goswami Bhattacharya

January 25, 2016: Saudi Arabia has reveled in its oil-rich economy for years, but is finally feeling the pressure of falling oil prices. So much that the government is considering austerity measures.

There are enough reasons to think about austerity, especially since the kingdom has pampered its citizens with cushy government jobs and lavish salaries post the Arab Spring. Add to this, almost all basic necessities are subsidised — right from oil to power.

Though officially nothing has been confirmed, the government is seeking advice from experts on ways to downsize its financial budget for 2016.

For over a year now, plummeting oil prices has been taking a toll on the economy. Since July last year, the government has borrowed about $15 billion from its citizens through local bonds, the first issuance of debt since 2007.

The government is also looking at other measures to cut costs. For instance, a leaked memo from the finance minister dated September 28, 2015 reveals that ministries were instructed to stop new projects and cease buying cars, furniture and lavish goods. The government never denied the contents of the memo.

In the past decade or so, government spending quadrupled across a range of key industrial sectors, subsidies increased and so did salaries. As a result, the price of oil at which the government can balance its books went up to $100 per barrel. However, the price is now hovering around $30 per barrel.

Hussein Hassan, a former UN public policies and anti-corruption expert, says, “There is no denying the fact that Saudi Arabia has enough reserves to survive for now. But if the price of oil remains at this level and expenditure is not cut, the reserves will be depleted in the next five years.”

Earlier this year, the IMF predicted that Saudi Arabia would post a deficit of 20 per cent of GDP for 2015, and that economic growth would slow down to 2.4 per cent, down from the current level of 2.8 per cent.

Hassan opines that the government has to do away with subsidies, which is still a sensitive subject. “It is difficult to snatch something that people have got used to. Subsidies are now taken for granted. These are some hard decisions that need to be taken fast.”

Dr Steffen Hertog, Associate Professor in Comparative Politics, London School of Economics, says currently the government is focusing on cutting project spending, which is less politically sensitive. “It is also preparing energy pricing reforms though these are politically sensitive and would require careful communication, sequencing and potentially compensatory measures at least for lower-income households. Substantial tax reforms appear less likely at this point.”

Additionally, financial support to Syria and Egypt is also hurting its finances. It supports Syrian rebel forces fighting Islamic State militants. Moreover, in early 2015, Saudi Arabia, Kuwait, UAE and Oman together pledged $12.5 billion in aid to stimulate the Egyptian economy during an investment summit. “Besides, the Yemen war is costing the kingdom too much money. Saudi happens to be one of those countries which have a very high defence import cost. In order to reduce that, it has to stop participating in these wars,” says Hassan.

Hertog says that just increasing VAT as is planned on the GCC level will not help in the long run. “There is no doubt that the government should gradually look to increase VAT. But the revenue potential is somewhat limited as state spending (and hence revenue need) is quite large relative to the size of the Saudi private sector. Substantial taxes would decrease economic activity at a time when the economy is already slowing down. So some potential is there, but by itself, it is far from sufficient.”

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Peter Vanden Houte

August 14, 2015: It seems as if a deal on a third bail-out package (€86 bn over the next three years) between the Greek government and representatives from the IMF, the European Commission, the ECB and the ESM has been reached, although some outstanding issues remain. The agreement foresees a primary deficit of 0.25% of GDP this year. In 2016, Greece should post a surplus of 0.5% of GDP, 1.75% in 2017 and 3.5% in 2018. This takes into account a GDP contraction of between 2.1% and 2.3% this year, 0.5% next year, while 2017 should see the economy expanding again by 2.3%. If anything, these forecasts seem to be on the higher end of expectations.

The Greek newspaper Kathimerini mentioned that in the draft deal 35 prior actions were stated that the government should implement before any money can be disbursed. It includes a review of the social welfare system, phasing out early retirement, reform of the favourable tax treatment for the islands, product market reforms as proposed by the OECD, deregulation of the energy market and a change in the taxation of shipping firms.

As Greece has to repay the ECB on August 20, the country hopes to receive the first bail-out money before that date. That needs a speedy approval of the deal. A meeting of the Eurozone finance ministers should then approve the new package.

Germany also needs parliamentary approval of the agreement. Although Angela Merkel was not keen to accept a hastily concocted package and signaled she would have preferred a new bridge loan to allow for more time to put together a bail-out program, we don’t believe that the country will oppose the agreement.

A more thorny issue is debt relief. Germany wants the IMF to participate in the program, but the IMF is unwilling to do so, unless there is some debt relief for Greece. While most European countries oppose a haircut on official loans, there is still some scope to alleviate the debt burden by lengthening maturities and reducing interest rates. However, it remains unlikely that the European creditors will agree on upfront debt restructuring. That might only come after the first review of the new program, probably near the turn of the year.

The good news is that Greece has given up its confrontational strategy and seems to be willing to collaborate with its creditors to avoid “Grexit”. However, the economic situation has strongly deteriorated over the last eight months, making the fiscal consolidation still quite a challenge in a country that is tired of austerity. And the complete structural overhaul of the Greek economy the creditors are imposing seems a Herculean task for a government that doesn’t necessarily share the ideological underpinnings of the requested measures.

Peter Vanden Houte is an analyst with ING

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7th October 2013

Spain’s Prime Minister has presented its most pain free budget in many years, banking on a nascent economic recovery gathering steam in 2014. Based on a growth prediction of 0.7 percent the Spanish budget for 2014 included less cuts and greater stimulus, unveiling its government expenditures Finance Minister of Spain Cristobal  Montoro said the budget proposal was one for economic recovery which would allow the government to pave way for creation of new jobs. Spain’s 2014 budget follows a government revision of key economic data, forecasting gross domestic product (GDP) to rise 0.7 percent rather than  0.5 as calculated previously and lower than expected unemployment with a rate of 25.9 percent.

The debt laden country which is Eurozone’s fourth largest economy is climbing out of a two year recession, expecting a first quarter of economic expansion in the July through September period.

Banking Sector Stabilises

The European Central Bank and the European Commission said Spain’s banking sector is on the road to recovery, but the country must keep up the pace of overhaul, especially on the labour markets and pension reforms. The country slipped into recession in 2008 when a real-estate boom collapsed, making its banks insolvent and raising doubts about the country’s solvency, GDP of the country which staged a recovery in 2010 and 2011 has shrunk 7.5 percent in the past five years. The debt laden country received $ 135.2 billion credit line from the European Union in exchange for a commitment to restructure its banks and continue its austerity programmes. The bailout package has seems to have done a lot of good to Spanish banks, the banking sector liquidity and the financing structures have improved as bank deposits have risen and lenders have regained their access to market funding.  On the negative side, mortgage delinquencies have reached to 5 percent for the first time, just a year ago this was just 3.23 percent – thwarting the efforts of the government to increase its growth forecast. European review agencies have said it was vital to maintain the proper checks of the banking sector’s solvency and resilience to shocks. However, the recovery in the banking sector has prompted the Prime Minister Mariano Rajoy slash Spain’s huge budget deficit from an estimated 6.5 percent of GDP to 5.8 percent of GDP in 2014. In order to achieve the projected growth the government is freezing civil servants’ salaries for the fourth consecutive year and plugging loopholes on corporate taxes and create more revenue from sales taxes. The government has also adopted a pension reform plan, which would save 800 million Euros next year and 33 billion Euros over the course of the next decade.

Unemployment

Spaniards continue to migrate to Germany and France where they find suitable jobs, despite a downward revision – the government still expects unemployment rates to end the year at 26.6 percent and expects it to fall at 25.9 percent at the end of 2014.

Tourism

The number of tourist visits grew by 3.9 percent in the first seven months of the year compared to the same period in 2012. The number of foreign visitors increased this year mainly due to civil unrest in Turkey and Egypt, the number of visitors from Russia has seen a huge increase followed by Britain and France. Tourism contributed over 5 percent to the nation’s GDP and added 900,000 jobs in 2012.

Exports Boom

The country embroiled in an economic crisis- may have finally seen some kind of hope in the form of  rising exports, “The country’s exports are outpacing other countries including Germany” said Antonio Roldan, a European analyst at Eurasia group – adding cheap labour have increased its competiveness in the exports industry. The Port of Barcelona in north-east Spain is a bee-hive of activity where export drive can be seen, the Port is the country’s third largest container dock, behind Valencia and Algeciras, and handles exports and imports of more than 3000 countries, representing a combined turnover of 300 billion Euros ($ 393 billion). Roldan said the port- a vital channel for all Spanish external trade, has become an artery of the economy. It employs over 13,000 people and on its website claims that for every two jobs it creates, three additional jobs are created in the economy as a whole. The economic ministry said the shortfall of exports to imports fell to 786.7 million Euros, Spain exported goods and services worth 19.86 billion Euros, a record for July and a 1.3 percent rise on the same period a year ago. Its trade deficit fell by 68.8 percent in the first half of 2013 to 5.8 billion Euros, the Economic ministry said.

Spain’s senior populace and bankers say the country is not only emerging from recession but has used the harsh years of the downturn to make the economy more competitive, less dependent on real-estate and relying on macroeconomic indicators such as high-value exports. However, despite the resurgence of the banking sector and growing Exports, the economic hardship continues with staggering unemployment levels and low standards of living, in places such as Andalucia, the economic hardship is severe.

Our View

Eurozone’s fourth largest recovery has staged a recovery of sorts – the numbers are impressive, after nine successive quarters of decline, Spain’s GDP is expected to return to growth this quarter. Exports, which accounted for 20 percent of GDP before the crisis, now make up almost 35 percent of national output. The recovery path architected by political leaders in Berlin has seen positive results, the current account which had a deficit of 10 percent in 2007 is expected to have a surplus of 2 percent this year, its  well architected spending cuts, tax increases and labour market reforms are bearing results on the economy but seeing outrage from the ordinary voters and trade unions. The export backed recovery of Spain has other dangers, Madrid revealed earlier this week that its public debt was 100 percent of GDP and some economists reckon the debt will rise to 110 percent by 2018. As Prof. Juan Rubio Ramirez, Professor of Economics  at Duke University in North Carolina says it is very rare for a country to suffer from such high levels of external and internal debt, leaving it vulnerable for external shock and renewed market jitters. “You need high growth or high level of inflation to make that kind of debt sustainable” he says.

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