LONDON, 11 February 2003 — Saudi economic reforms have taken on a new urgency in the last few weeks. While bankers and economists have in general welcomed them, they have also expressed their concern about whether the Kingdom is actually able to implement them. They also seek clarification on the time frames.
In Nov. 2002, the Council of Ministers approved a list of 20 sectors targeted for privatization. The program expanded on earlier policy statements by bringing in new sectors such as health, education and social services for privatization in the Kingdom. However, that announcement also failed to give a detailed timeframe for privatization.
Saudi economists would like to see a detailed schedule for the utilities primed for early privatization. Moreover, they stress that without the necessary legal and regulatory infrastructure, a comprehensive privatization policy will in any case not be possible.
Privatization aside, the Kingdom’s economic and financial management is perceived to be erratic. On the one hand, there is a fast track toward certain selective reforms such as foreign investment, foreign ownership of land or property, partial privatization, new laws like the insurance, capital markets, and stock exchange laws. On the other, there is institutional lethargy, confusion and inexperience, which sometimes borders on incompetence when it comes to policy implementation, enforcement and monitoring.
In macroeconomic policy, the government has won some plaudits for the 2003 budget. The budget sees a 7 percent cut in expenditure compared with 2002. Expenditure is projected at SR209 billion in 2003, compared with estimated actual spending of SR225 billion in 2002. Revenues are similarly projected at SR170 billion, compared with estimated actual revenues in 2002 of SR204 billion.
As such. the budget deficit is projected at SR39 billion (about 5.7 percent of GDP). But this is based on an average price of Saudi crude oil of $17.5 per barrel ($19.5 for Brent blend), which is increasingly seeming very conservative.
Even with the serious political situation in Venezuela and the uncertainty over the Iraq crisis, high oil prices would be unsustainable. The Western economies are in a virtual recession, with the US and Europe particularly badly affected. The pressure on OPEC not to exacerbate this situation is very strong. Saudi oil export markets in Asia, especially China and Japan, are also experiencing economic difficulties. Despite its impressive GDP growth forecast of almost 10.5 percent, China’s economy is overheating and unemployment in rural areas is causing serious concern. Successive Japanese governments have also failed to effectively reform and restructure the financial sector, still reeling from huge exposure to bad loans and corrupt practices almost two decades ago.
Saudi Arabia’s domestic debt is burgeoning out of control — the 2002 figure is estimated at SR637.5 billion, equivalent to 92 percent of GDP, one of the highest in the OECD and second only to Italy’s 100 percent of GDP. The government plans to reduce this public debt through privatization proceeds, but given the slow pace of privatization and an absence of a timeframe, one can only assume that the Kingdom’s public debt situation will persist for the next decade or so.
The biggest downside of the budget and macroeconomic-policy is the lack of transparency and disclosure. Compared to, say, the recent Bahraini budget for 2003, Saudi Arabia does not disclose allocations to the Royal civil list (including the royal court), defense and some other items.
In the foreign debt sector too, the Kingdom is currently embroiled in a messy dispute with Dresdner Bank and Barclays Bank over the alleged non-payment of a $48 million loan facility. The two banks have filed a suit against the Saudi Ministries of Finance and National Economy and of Defense for a loan to the Compound Lending Corporation, and SPV set up to finance the lease of military compounds from the Ministry of Defense through advance rental income streams. The two banks allege that the 9-year loan facility carried a sovereign guarantee, which the Kingdom has allegedly reneged on. The Kingdom has had payment difficulties to foreign suppliers and lenders in the past, especially when budget deficits were at historic highs.
Such high-profile disputes could affect the Kingdom’s sovereign rating by the likes of Moody’s, S&P and Fitch. However, the amount involved in this latest dispute is low and so is unlikely to precipitate a rating review.
The biggest policy implementation problems, however, have recently impacted on the financial sector. The shambolic way in which the Saudi Arabian Monetary Agency (SAMA) handled the investigation of the 25 illegal and unauthorized companies who amassed SR7 billion in illegal deposits has raised serious questions about the regulatory authority’s monitoring and enforcement structures and capabilities. It took the Ministry of Interior to override what really is the responsibility and domain of SAMA, namely to ban these companies, although many Saudis are baffled as to how you can ban an illegal company.
Such shortcomings send out the wrong signals at a time when the Kingdom is urgently seeking to restructure and reform its financial services sector. They also strongly suggest that a piecemeal approach to reforms is totally inadequate, and that without the pre-requisite legal, regulatory, monitoring, and enforcement infrastructure, any reform policy is doomed to flounder.
SAMA, like most Saudi ministries and government agencies, suffers from a serious transparency and disclosure deficit. One way this can be mitigated is for the Shoura Council to step up its scrutiny of the ministries and agencies, especially through open and public hearings.
Another recent debacle was the implementation of the ruksha (motor insurance) policy. Once again, neither SAMA nor the government have answered the serious questions relating to the monopoly of National Company for Cooperative Insurance (NCCI). The Shoura Council has recently confirmed that once the new insurance law is adopted and ratified, foreign insurance companies and foreign investment in local insurance firms will be allowed in the Kingdom.
The capital markets law, which was approved by the Shoura Council in December 2002, is only expected to be ratified in April 2003, and most of its provisions will neither be retrospective nor implemented within a two-year period. The law has four main components — the creation of a stock market; a securities & exchange commission; the deregulation of brokerage services; and the creation of a depository center. Unless Riyadh acknowledges that reforms and restructuring have to go hand in hand with a detailed schedule of legal and regulatory infrastructure and an implementation timetable, its efforts toward market liberalization and opening up of the country will not bear significant fruit.
