Daily Times

The Saudi Arabian budget for 2017 was generally well received. Most commentators and analysts applauded the Kingdom’s most important-ever budget, and were impressed by the unprecedented level of detail that accompanied it. Even some critics who have been skeptical of the plans to transform the country welcomed it as a genuine and meaningful attempt to reduce dependence on oil revenue and move it out of public sector dominance.

They were especially impressed by progress toward cutting the fiscal deficit, with a 33 percent reduction penciled in for 2017, while making firm commitments to paying the backlog of invoices built up by contractors and removing – in a controlled manner – the expensive subsidies on fuel and other utilities. So far, so good, was the message.

But no battle plan survives contact with the enemy, as somebody once said, and there are a number of hostile forces out there that could blow the Saudi economic strategy. There are, of course, the “black swan” events that are, by definition, impossible to foresee, but there are also variables in the global economic and geopolitical outlook that could go against the Kingdom’s ambitious plans.

The first, and most significant, is the oil price. The 2017 budget assumes a cautious average price of $50 a barrel, but even this conservative assumption supports a big increase in total revenues. Any shortfall would have a big effect on the ability of the Kingdom’s policymakers to meet the 2017 targets.

In this respect, the news is encouraging. Most oil experts see significant upside in oil at current prices. Some have even gone for a $70-80 range by the end of next year, but even at the consensus range of $50-60 per barrel, the Kingdom’s revenue projections look safe. Anything higher than $50 is a bonus.

Next come the prospects for the global economy, which drives the oil price and overall levels of activity in the Kingdom. The 2017 projections are based on the global growth forecasts of the International Monetary Fund, which at 3.4 percent of GDP suggest a slight increase over last year. The IMF is renowned for the caution, even pessimism, of its forward projections.

But there are any number of “black swans” looming on the global economy horizon. In the new era of President-elect Donald Trump, there is much uncertainty about the future of global trade, especially in relation to the future relationship between the US and China.

This is the most critical economic factor in the world today. America and China are the best of “frenemies,” each with the power to deal grievous blows to the other’s economy. If a US move toward greater protectionism turns the Mexican stand-off into a full-blown trade war, it would hit the oil price and the global trading patterns on which Saudi (and the rest of the Gulf) depend.

Even without a Trump-inspired trade war, China is already frightening many economists. The country’s move toward domestic consumerism is fraught with potential difficulties. China has the potential on its own to tip the world back into recession, and to trigger another financial crisis.

Along with this more abrasive economic relationship between the great powers is a growing geopolitical tension that could also throw Saudi calculations off course. The risk analysts attached to most big financial institutions these days are more pessimistic about political threats in 2017 than they have been for many years, and Saudi Arabia – in the middle of an increasingly risk-prone region – could bear the brunt of any surge in regional tensions.

The Kingdom has applauded the more pragmatic tone from the new US administration toward Iran, but any heightened and open hostility in the Arabian Gulf would simply be bad for business, at least in the short term, and could downgrade Saudi economic growth assumptions. An increase in the oil price as a result of these tensions might go some way to compensating, however.

Some commentary on the budget proposals focused on the new levies on expatriate workers in the Kingdom. While it is recognized these are a vital part of the national economic strategy, there is some concern that international business will be deterred from investing in Saudi as a result. All the Gulf states face a similar dilemma.

Finally, the global financial scene is – China apart – relatively positive. The “Trump surge” in US markets and asset values has brought a feel-good factor to the rest of the financial world too. Some economists see this as running out pretty quickly, but that should not happen soon enough to affect Saudi’s 2017 assumptions. The economic and financial backdrop for the Saudi budget 2017 is, on the whole, benign. But who knows how it will look when policymakers gather to draw up the 2018 figures?