'Saudi Arabia on right path for diversifying economy'

JEDDAH: Although Saudi Arabia has substantial financial reserves to withstand low oil prices over the next few years, recent government spending has intensified the need for longer term fiscal, environmental and resource sustainability in the Kingdom, according to a new ICAEW report.
The report — Economic Insight: Middle East Q2 2015 — is produced by Cebr, ICAEW’s partner and economic forecaster.
Commissioned by ICAEW, the report provides a snapshot of the region’s economic performance. The report undertakes a quarterly review of the Middle East, focusing on the Gulf Cooperation Council (GCC) member countries (Saudi Arabia, the UAE, Bahrain, Oman, Qatar and Kuwait), as well as Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated to GCC+5).
Lower oil prices will have a greater impact on Saudi Arabia’s economic growth over the medium rather than the short term.
As a result of the government’s decision to allocate additional funding to social activities like education, the break-even crude oil price has surged from just under $75 in 2009 to $90 in 2015.
While the Finance Ministry plans to address this by curbing public sector salaries and allowances, which comprise roughly half of the budget, a longer term strategy for generating growth among nonoil sectors is now crucial for the Kingdom.
Fortunately, Saudi Arabia has been investing significantly for many years in education, agriculture, and banking and finance to limit its oil dependence. Recently, the Kingdom announced that from mid-June 2015 foreigners will have direct access to its stock market. The opening of the $570 billion-plus bourse is a substantial leap forward for regional equity markets and is likely to draw a number of investors that see potential in the Kingdom’s proliferation of longstanding companies and the growing, increasingly affluent, population.
GCC economies could take advantage of lower oil prices to justify fuel subsidy reductions since diminishing government revenue will create a more pressing need to limit spending.
Also, if fuel subsidies are removed during a period of subdued oil prices, the inflationary impact will be felt less sharply by the population.
Scott Corfe, ICAEW economic adviser and associate director at Cebr, said: “There is no doubt Saudi Arabia is on the right path for diversifying its economy, but with lower oil prices here to stay, more action needs to be taken to safeguard the Kingdom’s financial reserves over the medium term.”
The report outlines the need for the business community to self-regulate — and for action to be taken at industry level to help curb the GCC’s carbon footprint. It also highlights the role of the accountancy profession in helping modify business’ behavior by setting benchmarks.
Resource sustainability is another important consideration for the sustainability of economic activity in the region. With population growth in the GCC region expected to expand at a rate above the world average, coupled by rapid urbanization, many countries will struggle to meet water demands.
Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia (MEASA), said: "The great fall in the global oil price need not reduce the impetus to use energy efficiently. Many of the GCC countries are now recognizing the urgency of the situation to secure their future development. This includes Saudi Arabia which is aiming to save a fifth of its energy use by 2030 through an efficiency drive designed to prevent domestic consumption from eating up oil for export.”