Saudi Arabia's crude awakening

The dual effect of weakening oil prices coupled with rising levels of government expenditures have translated into significant budget deficits for Saudi Arabia. Within a two year period 2014-2016, a fiscal balance surplus of Saudi Arabian Riyal (SAR) 180 billion turned into SAR 366 billion deficit. This abrupt swing served as a “crude awakening “to the Saudi government pushing for the implementation of sweeping reforms aimed towards realizing a balanced budget by 2020. It is argued that the proposed initiatives though necessary may not be sufficient and that currency reform should accompany them. This research advocates adding to the U.S. dollar peg, oil prices to form a joint peg allowing the SAR to be devalued when oil prices decline. The weights of the joint peg are determined and optimized by designing an architectural model that combines artificial neural networks with a genetic training algorithm. In so doing, petro dollar revenues would be secured while domestic expenditures denominated in a devalued SAR will cut domestic expenditures providing the needed tail wind to balance the budget.While oil, economic growth, and politics have always been intertwined in the region, the trajectory for Saudi Arabia’s future development had to be reset. What was initially thought of as a temporary price decline, became a somber realization of a paradigm shift in the oil industry. Prolonged sharp price drops and increased uncertainty resulting from nonconventional shale production exerted additional pressure on the government’s struggle to meet competing internal demands while maintaining a regional geopolitical leadership role. Driven by the realization that the new norm of oil prices was around $50-60 per barrel band, it became clear that sweeping reform measures were necessary. By abandoning the peg to the U.S. dollar and allowing the SAR to be devalued, the budget deficit can be overcome and the goal of achieving a balanced budget realized.