That’s certainly true of Saudi Arabia, whose appetite for arms and addiction to petrodollars have caused an economic obesity that the US, which should be this kingdom’s dietician, has just set out to redouble.
The $110 billion worth of arms deals that President Donald Trump and King Salman inked Sunday are beyond Riyadh’s means, irrelevant to its pressing needs, and injurious to American interests.
The deal is unaffordable for the Saudis because, as noted here last year, their seven fat decades are over due to oil prices’ historic decline, a trend whose grim repercussions the kingdom itself recognized in its plan to reinvent its economy by cultivating a manufacturing industry.
Riyadh’s boasting last fall that it had cut the budget deficit by nearly a quarter, from 376 to 297 billion riyals, did not change the basic fact that it had begun to spend money it didn’t have, something it never previously did.
With more than $500 billion in foreign currency reserves, the third-largest such pile in the world, one might think Saudi cash is bottomless. However, as recently as 2014 those reserves stood at $737 billion, meaning that within a mere three years the kingdom’s forex reserves plummeted by 30%, while overspending caused a staggering, 13%-of-GDP budget deficit.
It was the direct result of oil prices’ plunge over that period by more than 60%, and the markets’ way of messaging Riyadh it had better spend less, earn more, diversify its economy, and make much better use of its workforce.
The regime understood this, as reflected in the Vision 2030 masterplan it unveiled last year, which conceded the weaknesses inherent in allowing oil sales to comprise 90% of exports and 80% of internal revenues.
The plan was problematic to begin with, particularly with its express vow not to institute income taxes, but the blueprint at least conceded that oil can no longer be counted on to nourish the economy; that the economy is seriously ill; and that for it to heal the patient must first break with the past.
This means that spending $110 billion to buy more jets, tanks, and destroyers is economic lunacy. The Saudi economy needs even the last penny of this fortune in order to execute its own reform plan.
Moreover, the deals struck with Trump will compel the Saudis to do what they hardly ever do – borrow – because the production cuts they introduced last fall through OPEC failed to deliver their desired results, as prices hardly breached the $50-per-barrel barrier.
Costs aside, the Saudis don’t even need the arms for which they are now collateralizing their future.
ARMS AND THE MAN
The Saudi defense spending already is the world’s third highest after the US and China, according to the International Institute for Strategic Studies. The Saudi sense of threat from Iran is well founded, especially considering Tehran’s ignition of a civil war in Riyadh’s Yemeni backyard. Yet the Saudi military already has state-of-the-art materiel, and its funding, at 12.9% of GDP, is the world’s highest per capita.
Despite these resources, the Saudi military’ performance in Yemen has been unimpressive. The Iranian intrusion was blocked, but the Saudi Air Force failed to decide the war, nor to chase out of the Arabian Peninsula the Iranian advisors Riyadh sees as invaders.
More jets, boats and guns will offset none of this, other than multiply the kind of havoc Saudi jets have already wreaked on Sanaa. What needs to change is the handling of the expensive weapons the Saudis already have, and that can only be done through the social overhaul – in this regard, the educational reform – that the Saudi masterplan rightly hails.
Now there will be no money for this plan. Worse, the Saudis have promised to take $65 billion from their sovereign wealth fund and use it to develop US infrastructure, a vow that made Trump boast that he and the Saudis are creating “jobs, jobs, jobs.”
Well that’s very nice, but those are American jobs, which are surely an urgent goal in its own right, but the Saudis need to create Saudi jobs, and that too is an American interest, lest young Saudis become frustrated, restless, and attentive to the very extremism that Trump has just admonished them to shun.
Saudi arms purchases are rational; the kingdom has a real enemy half-an-hour’s flight to their east. Yet in its military scale, financial price, and social costs the deal they juts struck with Trump is irrational. The task of the kingdom’s American patron is therefore not to perpetuate Riyadh’s fiscal habits, but to help the Saudis put their evaporating resources to much better use.
This would be in keeping with the broader American interest, which is to make the entire Middle East spend less on arms and more on factories, schools, and farms. Sadly, such a mindset entails a kind of rationality that can hardly be expected to inhabit the White House anytime soon. (Dow Jones MarketWatch 23 May))