Saudi Arabia has dodged a financial crisis due to low oil prices by slashing state spending and borrowing tens of billions of dollars abroad, but now it faces a tougher challenge: Getting the economy growing again
Senior Saudi officials said reforms announced on national television by Deputy Crown Prince Mohammed bin Salman a year ago had stabilized state finances enough for the government to begin focusing on investing in the economy, in a series of interviews with Reuters reporters last week.
Spending cuts are shrinking a $98 billion budget deficit that was created by oil's plunge. Foreign investors are eagerly buying Saudi bonds, and the government has begun to shake up its bureaucracy and simplify regulation, promising efficiency gains.
Movements in the foreign and exchange and bond markets show last year's speculation that Riyadh could default on its debt or devalue its currency has almost disappeared.
Vice Minister for Economy and Planning Mohammed al-Tuwaijri said efforts to repair state finances were moving faster than officials' initial, conservative projections. The deficit in the first quarter of 2017 was about half the original estimate.
"Generally speaking everything we announced and talked about tended to be toward the conservative scenario - that included our ability to execute everything on time, our ability to borrow."
So Riyadh is now starting a new phase of reform, officials said: developing non-oil industries such as mining, logistics, ship repair, entertainment, and automotive and military manufacturing that will let the economy prosper regardless of oil prices. "There are many low-hanging fruits," said Tuwaijri.
Riyadh aims to raise over $200 billion in coming years by selling stakes in oil giant Saudi Aramco and other assets. It will funnel this money into non-oil industries via vehicles such as sovereign wealth funds. Private firms will be encouraged to invest beside the government with incentives such as soft loans.
Officials stressed they would be flexible when raising money - using methods ranging from stock market listings to private equity deals - and careful when spending it, since they would only allocate money to projects that looked commercially viable.
They argued that by creating jobs and economic growth, the surge of investment would head off any discontent from Saudis whose living standards are being squeezed by tax rises and subsidy cuts needed to reduce the budget deficit.
The presence of hundreds of foreign bankers and investors at a conference staged by Euromoney magazine in Riyadh this week showed huge interest in the potentially lucrative deals promised by the reform drive. But many investors remain cautious.
In particular, they are unsure whether the government can revive economic growth as it wrestles with the budget deficit, which it has vowed to bring down to zero by 2020 from a mammoth 15 percent of gross domestic product in 2015.
"The country is just at the start of a major transition. This process will take years and is fraught with risk," Middle East investment firm MENA Capital said in a report explaining why it was keeping its exposure to Saudi assets minimal.
The government's plans to raise money with asset sales, and to encourage private firms to invest through "public-private partnerships", will depend on convincing foreign investors they can earn a good return.
But this will depend partly on economic growth, which has been stifled by Riyadh's spending cuts. Expansion of the non-oil part of the economy slowed near zero last year and officials concede it will be tiny in 2017, perhaps 0.5 percent.
Central bank data last week showed bank lending to the private sector in March shrinking year-on-year for the first time in at least 11 years - not a signal of enthusiasm to invest among private companies.
Recognising the need for growth, the government last month relaxed one big austerity step by restoring financial allowances to civil servants.
Saudi officials indicated in the interviews that fiscal policy aimed to avoid any outright contraction of the economy. Jihad Azour, head of the International Monetary Fund's Middle East department, said this week that he believed Riyadh had some room to ease fiscal policy further if needed.
But if the government relaxes austerity much more, markets could start worrying about Riyadh's deficit again. So fresh belt-tightening steps are set to go ahead, such as the introduction of a 5 percent value-added tax in January.
Another source of uncertainty is the shape of the public-private partnerships. These will be complex legal documents that set out how much risk private investors must bear and what share of projects' profits they can expect.
It is not clear when authorities will finish designing these documents, or whether the kingdom's undeveloped legal system can enforce them effectively. Officials said they would tailor different partnership structures for different sectors, which could benefit investors but also increase complexity and delay. Mazen al-Sudairi, head of research at local financial firm Al Rajhi Capital, said Saudi Arabia had managed the turmoil of the past two years effectively and now had a solid base for growth in the long term. But it will remain vulnerable to oil price fluctuations for a considerable time, he added. "Oil prices remain the main challenge and the major risk - if demand becomes much weaker, this could have a major negative impact on reforms."
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