new era brings, inevitably, politically motivated spending.

According to estimates, the

administration of the new King Salman has allocated $32 billion to spend in various areas.
This sum, which is meant to reinforce stability in the country, is below previous figures seen
at various stages, yet its impact will be vital in the near-term amid huge challenges facing
the king and the kingdom.
The failures of the financial management of Spains King Philip II are legendary. His country
defaulted four times on its debt under his reign, with disastrous effects.
A study published by the University of Zurichs Hans Jochen Foth in 2011 concluded that the
Spanish throne in the period in question (1560-1598) had enough financial discipline to hedge
against bankruptcy, and that what really broke the back of the kingdom was the failed invasion of
England, and the defeat of the Spanish Armada for a multitude of natural, strategic, and tactical
reasons.
From ancient history all the way to the House of Habsburg in Spain in the 16th century, it has
always been obvious that each era has its extravagant, tyrannical, or simply unfortunate
sovereign. The worst case would see all three qualities present in one person.
In the present era, Saudi Arabia is a living example of a kingdom undergoing one of the most
critical periods in its history since its establishment in the early 20th century. In the past 10 years,
we saw how Saudi Arabia scrambled to preserve its regional influence, as its strategic standing
declined in many arenas. Even its relationship with its traditional ally the United States suffered,
on the back of contradicting regional policies and changing dynamics in the energy markets.
The death of King Abdullah coincided with a dramatic collapse in oil prices, the cornerstone of
the House of Sauds rule. This has contributed to making the next phase that much more critical.
However, all these considerations remain secondary compared to the main one, namely, the
political money that the House of Saud use to prop up their power from the oil revenues.
The new king quickly used this money to jumpstart his reign. According to a recent Financial
Times report, the political spending package, which is distributed as grants, social welfare, and
investments, is worth $32 billion.
The spending package is part of a natural process in Saudi. There, the government is responsible
for nearly two-thirds of overall investment, and spends lavishly on social welfare to maintain the
legitimacy of a regime based on extremist interpretations of religion that go as far as to ban
women from driving.
How long can Saudi Arabia maintain this stability and balance its budget in light of falling oil
revenues?
During various sensitive events in the region, the regime was able to use this money to support
its legitimacy. At the peak of the Arab uprisings in 2011, immediately after the ouster of Zine alAbidine Ben Ali in Tunisia and Hosni Mubarak in Egypt, King Abdullah launched a spending

program worth $130 billion. According to the Financial Times report, which is based on the
opinions of financial, political, and banking experts, the late kings lavishness bought social
stability for the last years of his reign.
Therefore, the question that arises now is: How long can Saudi Arabia maintain this stability and
balance its budget in light of falling oil revenues? How can Saudi afford to pay for generous
spending programs like the ones it put into action when oil prices were at $100 per barrel?
This is the challenge for the new king, a financial challenge by its very nature.
According to a report published by the IMF in January, on the back of falling oil prices, Saudi
Arabia is posed to lose around $138 billion in revenues in 2015. This equates to about 25 percent
of Saudis GDP.
A paper by Citibank corroborates this. It states that Saudi will lose nearly a third of its previous
oil revenues due to falling prices.
The sharp financial decline intersects with two other important issues. The first is local, and
involves the challenge of creating more than 2 million jobs for Saudis in the next 10 years, and
consequently absorbing potential unrest among young people. Currently, Saudi Arabia is
implementing an ambitious education policy that includes sending students to acquire knowledge
in Western universities, but assimilating the graduates remains a big challenge.
The second important issue is the regional situation, which forces the Saudi regime to prop up its
influence through generous spending. This has high costs that are not easy to maintain in light of
the current crisis. Yet it is not really an option to abandon this policy, because losing regional
bargaining chips means ending Saudi influence. Just as Saudi spends 4 percent of the GDP in
fuel subsidies the second largest in the region after Iran it has to support allies to guarantee
its loyalty.
In principle, Saudi Arabia is able to absorb the shock of falling oil prices and reduced revenues,
in the near term. Saudi has accumulated formidable foreign currency reserves during the years of
high oil prices to the tune of $700 billion which would cover three years of imports at
current levels. In other words, if foreign currency stops flowing to Saudi coffers, the royal family
can still finance the import of basic goods for the period we stated.
Saudis financial situation is among the worst in the GCC The Kingdom is expected to run a
deficit of 10 percent of GDP in 2015, double the GCC average, and three times the Iranian deficit
expected this year.
However, on the other hand, Saudis financial situation is among the worst in the GCC. The same
IMF report said the Kingdom is expected to run a deficit of 10 percent of GDP in 2015, double
the GCC average, and three times the Iranian deficit expected this year.
The deficit is due mainly to Saudis over-reliance on oil revenues to finance its budget, which
requires a price of $80 per barrel to be balanced. In addition, there are the ambitious social
welfare programs meant to guarantee stability.

Clearly, the Saudis are dealing with the reality of the recent developments in the global oil
markets. On more than one occasion, they said their position on the market has to do with
avoiding losing market shares to the United States and new producers. For this reason, they
prefer to lose a little now, than to lose the whole game in a while.
May be the oil price will surpass $100 in less than two years as a result of falling investments.
However, the extravagance the Saudi royal family is known for may no longer be possible. Their
main concern today must go beyond oil production and competing with American producers.
So far, the Saudis have failed to create an economic environment that would focus on
specialization and create jobs. This failure could cost the new king a lot, and could threaten him
with an experience similar to that of King Philip II.