Pandemic shock leads to ‘overhaul’ of Saudi finances

Saudi Arabia’s Energy Ministry said it has asked oil giant Aramco to make an additional voluntary output cut of 1 million barrels per day starting from June. (AFP)
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Updated 12 May 2020

Pandemic shock leads to ‘overhaul’ of Saudi finances

  • Bold measures set to save $26 billion with proceeds to help businesses get back on their feet

DUBAI: The full scale of the economic shock from the coronavirus pandemic has been revealed in radical measures taken by Saudi authorities to cut allowances, reduce project spending and triple value added tax in what economists called an “immediate overhaul” of the Kingdom’s finances.

In announcing the measures Finance Minister Mohammed Al-Jadaan said: “These are the priorities: The healthcare of people and the livelihood of people. We want to make sure that we maintain our fiscal strength so that as the economy gets out of the lockdown, we are able to support the economy. What we have seen from the announced measures are the ones that the team — both economists and other experts — thought would be the least damaging to the economy and the fiscal strength of the country.”

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said: “The reforms are positive from a fiscal side as greater adjustment is essential.”

Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes, said: “These are very bold measures necessitated by the sharp deterioration in the government’s fiscal balances.”

The Tadawul index fell 1.18 percent on the announcement, still some way above the lows at the height of the oil price war last month. The price of sovereign bonds rose on the news.

The steps taken will save around $26 billion, the Saudi minister said, with the proceeds being re-allocated to healthcare and aid for businesses during the pandemic. He added that the SR220 billion ($58.7 billion) already indicated to bridge the deficit this year would still be sufficient.

The Kingdom’s finances have also been hit by the dramatic reduction in oil revenue as a result of falling global demand during the pandemic.

“Despite all that is taking place around the world, we are committed to continue our reform, we are committed to ensuring that we have the fiscal strength and maintain our reserves, maintain our fiscal buffers. We are not cutting spending, we are reallocating spending,” Al-Jadaan said in the transcript of a phone call with Bloomberg.

He acknowledged that, with consumer spending at low levels because of the lockdowns in the Kingdom, the VAT increase would not raise significant revenue immediately. “As we get out of this, the government will be here to support the economy, support the private sector to ensure that they are not out of business during this period.”

John Sfakianakis, a Gulf expert at Cambridge University, said that tripling VAT would test the limits of the balance between revenues and consumption as the economy “dives into a deep recession.”

The surprise financial package also included measures to remove the SR1,000 a month cost of living allowance for government employees, which was a temporary measure. 

Some of the programs in the Vision 2030 reform plan — to diversify the economy away from oil dependency — will also be affected by the spending reviews underway. But the major ones, like giga projects NEOM and the Red Sea Development, are continuing. “It may not be as fast as it used to be, but they are continuing,” the minister added.

He also announced a review of salary scales in “new government organizations” that have been created with a view to narrowing the gap with traditional civil service salaries.

Mazen Al-Sudairi, head of research at Riyadh-based Al-Rajhi Capital, said it was too early to tell what the effect of the VAT increase would be on inflation levels, but that the rise “might be here to stay.”

Tarek Fadlallah, chief executive of Nomura Asset Management in the Middle East, said: “The subtle approach to diversifying the Saudi economy and raising non-oil revenues has been too slow. The authorities have accepted the need to induce a painful and immediate overhaul of the economy in the hope of longer term gains.”


INTERVIEW: ‘We were built for times like this’, Johnson & Johnson exec Marzena Kulis says of company’s role in fighting pandemics

Updated 20 September 2020

INTERVIEW: ‘We were built for times like this’, Johnson & Johnson exec Marzena Kulis says of company’s role in fighting pandemics

  • 134-year firm searches for a vaccine while tackling other regional medical issues

Being a senior executive at a medical company during the most serious health care crisis for a century puts you at the sharp end of events, as Marzena Kulis, managing director of the medical products business of Johnson & Johnson in the Middle East, is well aware.

“We were built for the times like this. We are a company with a 134-year legacy.

“We lived through the previous pandemics of smallpox and Spanish flu, and through the financial crises, through world wars, and our business has expanded and grown,” she told Arab News.

“But it would be wrong to say that what happened in the past few months had no impact on the local, regional and global businesses,” she added.

J&J, a multibillion-dollar giant of the global health care industry, has been in the region for more than 40 years, operating via the three pillars of its business — medical devices, pharmaceuticals and consumer products.

But there is no doubt that the company’s profile has been lifted during the pandemic through its work on a potential vaccine. J&J is one of several international companies working flat out to develop a treatment since virtually the first outbreak earlier this year. 

Kulis, an economist by training who has spent almost her entire career in the health care sector, has seen that at first hand in recent months.

“I think our teams globally have been working tirelessly, without a break really, on finding the solutions and, as of now, we are saying that large quantities of the vaccine will be available in the first quarter of 2021,” she said.

“In September, we are planning to begin phase three trials on humans, which will be on a large number of the populations chosen for the trials, but we still believe that it will be early 2021 when we will be able to deliver the vaccine,” she added. Some health experts have criticized the tendency toward “vaccine nationalism” by some countries, eager to be first with a treatment in an international race, or to keep supplies of the medicine for their own people, rather than spreading it equably around the world.

“We are open to discussion with everyone,” Kulis said, pointing to agreements J&J has signed with the US and European authorities on vaccine collaboration, as well as with international organizations such as the GAVI immunization agency supported by many countries in the Middle East, including Saudi Arabia.

J&J also signed up for the “We Stand with Science” campaign to uphold the integrity of the medical scientific process in vaccine development and global regulatory standards.

Kulis is aware of the pressure to produce a vaccine “cure,” but believes safety is paramount. “Although we all would like it to be available tomorrow, the process has to take its time to ensure there are high ethical standards and scientific principles,” she said.

Meanwhile, while the world waits for a vaccine, Kulis has a business to run in the Middle East. The medical devices business in the region includes surgical equipment, and orthopedics and cardiovascular procedures — all affected by the heightened focus on COVID-19 treatments during the pandemic.

In particular, some elective surgeries have been pushed to the back of the queue by patients understandably anxious to protect their health during the pandemic. Lockdowns and economic pressure have also had an effect.


BIO

Born: Krakow, Poland

Education

  • Master’s, Krakow Economic Academy
  • MBA, Stockholm University

Career

  • HD operations officer, World Bank 
  • General manager for Pfizer, Poland and Baltic states
  • Managing director, Johnson & Johnson, Middle East

“The UAE has restored or reopened some surgeries, but Saudi Arabia is still taking a bit more time reopening for elective surgeries, with the exception of some parts of the country. So, obviously, that has an impact,” Kulis said.

The financials of the business were better than expected in the second quarter, although still some way off what they would have been without the virus. One real positive is that the J&J global supply chain has remained intact, she said.

Kulis’ job gives her a unique insight into the medical problems of the region, and one issue stands out, she says — obesity and its associated complications. J&J sees the extent of the problem in its bariatrics specialism, which deals with the causes, prevention and treatment of obesity.

“This region is leading the obesity prevalence in the world and we provide medical solution for that as well,” she said, pointing out that three of the top five most obese countries in the world in terms of obesity incidence as a proportion of the population are from the Middle East.

Oncological and gynecological surgery is also a growing part of her division in Saudi Arabia. 

In orthopedics, Kulis said with a hint of humor, “the world has been walking on our knees and our hips for decades.” But there is also an important link to obesity, too, she said, because overweight people are likely to face greater mobility challenges.

“Sooner or later, as a consequence of obesity, people require joint replacement or some other orthopedic intervention,” she said.

The third segment of the medical devices unit is also affected by obesity problems. The cardiovascular and stroke speciality focuses on remedies for heart arrythmia and stroke management.

“We’re still raising the awareness of availability of the surgical treatment for those two. It’s especially important to show that stroke is not a death or disability sentence but can be treated. People can be brought to mobility and quality of life,” Kulis said.

J&J sees as another increasing problem for Saudi Arabia — the treatment of traumatic injuries from traffic accidents.

“It’s really prevalent and a strong focus in Saudi Arabia. The treatment of road accident trauma is part of our orthopedic business. Road accidents are an important part of our work in the Kingdom,” she said.

Overall, the health benefits of Saudi Arabia’s young demographic is, to some extent, outweighed by obesity and other lifestyle issues, she said.

The Kingdom is a focus for expansion for J&J. It opened a headquarters office in Riyadh in 2017, and also has bases in Jeddah and Dammam, serving as a base not only for the medical devices business but also the consumer and pharmaceuticals units. There are about 180 employees in the Kingdom, of whom roughly 40 percent are citizens.

“We have made a conscious effort to ensure we can build up local capacity and help the local population to work with us,” she said. J&J has a local Saudi partner, takes part in official programs to promote health and lifestyle issues within the Kingdom, and has a joint flagship program with the Prince Sultan Humanitarian City Hospital. 

The health sector has been earmarked for greater private sector participation in the Vision 2030 plans to diversify the Kingdom away from the government-dominated energy sector, and J&J is keen to take advantage of any opportunities in that respect.

“We are always exploring the option for enhancement of the business and definitely Saudi is our priority market. 

We haven’t been in any discussions regarding takeover or merger activity so far, but if there are opportunities, we will put it forward to our senior management. We are looking at any opportunity to strengthen our footprint in Saudi Arabia,” she said.

Including Saudi Arabia and the UAE, Kulis’s responsibilities at J&J cover the medial needs of 500 million people in 16 countries stretching from Pakistan to Egypt. But she is keen not to lose sight of the importance of individual cases within the many thousands of patients that benefit from J&J products and procedures every year.

“What keeps me up at night is this question — how can we grow the scale of the business so that we can help more patients get treatment at the right time?

“We all know the stories of people and the families who don’t get care on time, or who wait too long for treatment. I want to shape my organization so that we can share the same dream of preventing that,” she said.