Saudi Arabia may have already crossed the point of no return with its economic reform plan. A downgrade of the kingdom's credit rating by Moody's on May 14 came in response to a sharp deterioration in its finances caused entirely by falling oil prices. The kingdom is taking the hard path of reform rather than doing whatever it can to push up its crude revenues. That is undoubtedly the sensible option.
Saudi is burning through its foreign exchange reserves to offset declining export revenue and plug a budget deficit that is expected to average 9.5 percent of gross domestic product between now and the end of the decade. Moody's predicts that the kingdom will need to fund cumulative deficits of $324 billion by 2020. The figure would be equal to 75 percent of its gross income from crude exports at current prices over the same period.
Riyadh could easily look for a short-term fix by just pumping up crude prices to revive its finances. In the past, the kingdom worked with the Organisation of the Petroleum Exporting Countries to maintain higher prices and boost revenue. So far its powerful Deputy Crown Prince Mohammed bin Salman - the mastermind behind a reform policy called Vision 2030 - looks determined to push ahead with the challenging restructure of its one-dimensional economy.
That could end up with Saudi in an even stronger position to service its debts. The current plan, which includes selling a stake in state-owned oil company Aramco, would leave Saudi with a $2 trillion sovereign wealth fund. But it's a riskier way to get there. Besides, moving away from oil is only one of a series of challenges the 31-year-old prince faces, along with the need for political liberalisation, high youth unemployment and diabetes that affects almost a quarter of the population.
Those alone justify forging ahead with reforms. Over the long term, whether the prince can tackle them will matter far more to lenders and investors than his kingdom's credit rating.
