For the first time since 1999, Saudi Arabia is forecast to fall into an economic recession in 2017.
The kingdom's oil sector growth will continue to slow as austerity measures are implemented, according to a new analysis by BMI Research reported by Arabian Business. The report predicts that the Saudi economy will contract by 0.2 percent in real terms next year. In 2016, the economy has grown by just 0.8 percent.
The dismal forecast comes as the kingdom aims to make significant economic reforms and considerably diversify its oil-reliant economy.
Multiple geopolitical and economic events have put Riyadh at an economic crossroads, so to speak. Here are 5 things you should know about the kingdom's economic position.
1. Saudi Arabia just agreed to cut oil production in a deal with OPEC
At the end of November, for the first time since 2008, Saudi Arabia and the other OPEC member countries agreed to cut oil production by 1.2 million barrels per day as of Jan. 1.
The deal is contingent on non-OPEC members – such as Russia – agreeing to cut their production by 600,000 barrels. Thus far, Russia has welcomed the deal with the caveat that its production will need to be reduced gradually.
Saudi Arabia had ramped up oil production in response to increased production by the United States and Russia, flooding the market with excess oil and driving global prices down significantly. In January, the price of a barrel of crude dipped under $30. As of Dec. 2, the price has bounced back to more than $50.
Global oil prices surged after the recent OPEC agreement.
2. Trump's election has cast a shadow of uncertainty on the kingdom's future
During his presidential campaign, United States president-elect Donald Trump repeatedly called for completely blocking oil imports from Saudi Arabia. But, Trump has already backtracked significantly from several campaign pledges.
Saudi Arabia has also hired a powerful new lobbyist to join its team in Washington to take on the new administration, apparently to hedge risks of a new presidency.
But a Saudi diplomat told The Washington Post that the kingdom isn't more concerned about Trump than it was about President Barack Obama. He added that most members of the royal family "are happy with the result," saying Saudis "are closer to Republicans psychologically."
Saudi's Oil Minister Khalid Al-Falih, who also serves as the chairman of Aramco, seemed unfazed by Trump's rhetoric, saying the businessman would "see the benefits" of Saudi oil imports. He also said industry experts would likely advise the president-elect that blocking trade is unhealthy, calling the United States a "flag-bearer for capitalism and free markets."
3. Riyadh has been passing game-changing economic reforms
In September, the kingdom announced 20 percent pay cuts for all ministers and 15 percent pay cuts for Shura Council members. It also switched to the Gregorian Calendar in an effort to save 11 days of payments to public sector employees. Bonuses and other perks were also targeted by the reforms and sales taxes have been introduced.
More than two-thirds of Saudis work for the government, with the kingdom spending roughly 45 percent of its budget, or $128 billion, to pay their salaries in 2015.
The kingdom also sold $17.5 billion in debt in October. This was the largest-ever bond sale from an emerging market. The sale was hailed as a major success for the world’s top oil exporter, as it attracted investor interest totaling $67 billion, nearly four times the amount of the sale.
Saudi Arabia's deputy economy minister said that if these economic reforms are not followed, the kingdom faces bankruptcy in three to four years.
4. Low oil prices have taken their toll on the Saudi economy
Low prices have taken their toll on the global economy and Saudi Arabia has been feeling the effects as well. Riyadh's budget deficit reached a record high of $98 billion in 2015. It is expected to fall to $87 billion this year.
At the same time, the kingdom has well over half a trillion dollars in foreign reserves. But as oil prices have remained low and unstable, Saudi Arabia has dug deep into this reservoir. In July, the kingdom burned through $6 billion in reserves.
5. Economic reforms are a major part of Vision 2030
Deputy crown prince Mohammed bin Salman unveiled his expansive Vision 2030 reform plan for the kingdom earlier this year. The plan was approved by the Saudi cabinet in June.
Vision 2030 aims to create jobs, implement taxes, cut subsidies and diversify the kingdom's economy. Entertainment, education and other business sectors are the key targets of the reform plan. A five percent share of Saudi Aramco – the world's largest producer of crude oil – will also be sold to investors. This will be the company's first-ever public offering.
While some of the changes have been hailed as positive steps forward, many Saudis have also expressed discontent as austerity measures have taken effect.