Experts at UBS, the world's largest global wealth manager, have concluded that current fiscal measures deployed by the Kingdom of Saudi Arabia should help ensure a sustainable economic future for the country in the medium term, following a recent assessment by the bank's Chief Investment Office. The Kingdom has implemented several measures to protect fiscal balances from the oil price drop. Government spending was cut by 15% in real terms in 2015, and a further cut of 16% is envisaged for this year. Going forward, several measures will likely be implemented to raise the share of non-oil revenues, such as the introduction of VAT in the GCC region. The Kingdom also announced the ambitious development plan ‘Vision 2030' in April. The plan aims to reduce the Kingdom's dependence on oil, boost the private sector's role in the economy, lower national unemployment, and raise non-oil revenues almost four-fold to about 20% of GDP by 2020. It involves the creation of a large sovereign wealth fund, the sale of less than 5% of Aramco shares by 2018, and an array of fiscal and structural reforms. The share of nationals in total labor is projected to increase from 44% in 2014 to 60% by 2030, with most of the new jobs being in the private sector. Jorge Mariscal, Emerging Markets Chief Investment Officer at UBS Wealth Management, said "the key to ensuring that Vision 2030 is achieved is to guarantee that nationals are equipped with the right qualifications to make them competitive in the private sector job market, while absorbing talent transitioning from the public sector. Following the current fiscal consolidation and other proposed reforms, the Kingdom's finances should find a more sustainable footing in the medium term. This is despite declining oil revenues impacting fiscal and external balances and a surge in public spending. Government level reforms, including closure of a number of overlapping councils, commissions and committees, should benefit the economy, reducing red tape and making the government smaller, more efficient, and more accountable." However, UBS warns that even lower oil prices might pose a risk to reform implementation. Geopolitical risks could distract the government from much-needed reforms domestically. Non-oil GDP could be hit potentially due to austerity measures. The general government debt-to-GDP ratio is expected to be about 10% of GDP in 2017, up from 1.5% in 2014. The sovereign net foreign asset position is also expected to drop quite sharply. Growth is expected to slow to about 1.5% in 2016-17.
