'Silver Saudis' may pressure government reforms on age-related spending

Published July 12th, 2016 - 05:00 GMT
Analysts suggest that in Saudi Arabia, the old-age dependency ratio will rise to 23 per cent in 2050 from 4 per cent in 2015. (AFP/File)
Analysts suggest that in Saudi Arabia, the old-age dependency ratio will rise to 23 per cent in 2050 from 4 per cent in 2015. (AFP/File)

Saudi Arabia’s growing elderly population could put pressure on public finances and government debt over the next three decades in the absence of government reforms to contain the cost of age-related spending, according to Standard & Poor’s ‘Global Ageing Report 2016: 58 Shades Of Gray’.

S&P has forecast the Saudi Arabian population will expand rapidly from 32 million to 46 million between 2015 and 2050. Over the same period, the proportion of elderly people will rise to 15 per cent of total inhabitants from 3 per cent today.

“Age-related government expenditure on pensions and health care would rise to 14 per cent of GDP by 2050 from 6 per cent today. This could lead to a rapid increase in Saudi Arabia’s net debt ratio to 340 per cent of GDP by 2050 if governments were to take no further policy action,” said S&P Global Ratings analyst Trevor Cullinan.

Due to the rapid growth in the young population, subscribers to Saudi Arabia’s generous pension system have been outstripping growth in the number of beneficiaries, contributing to the overall financial health of the system.

The analysis suggests that in Saudi Arabia, the old-age dependency ratio will rise to 23 per cent in 2050 from 4 per cent in 2015. “In our view, an aging population will likely place substantial pressure on economic growth and public finances. Demand for publicly provided health care and long-term care services and state pensions could increase,” said Cullinan.

S&P analysts expect that the bulk of Saudi Arabia’s age-related spending will go toward pension outlays, projected to rise to about 9 per cent in 2050 from about 3 per cent in 2015.

If unmanaged, the weight of general government spending could rise significantly as age-related spending increases, coupled with a rising interest bill as deficits and debt mount. The study suggests that without fiscal or structural policy reforms, net debt could rise to 340 per cent of GDP by 2050 in Saudi Arabia. This would make Saudi Arabia one of only six sovereigns with net debt levels above 250 per cent in 2050, the others being Brazil, China, Japan, Russia, and the US.

S&P expects that under a hypothetical no-policy-change scenario, the current ‘A-’ rating on Saudi Arabia would likely come under increasing pressure over the next 30 years.

“By 2045, we expect that Saudi Arabia’s fiscal indicators will have weakened such that they would be more in line with sovereigns currently rated in the speculative-grade category, because, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration. The sovereign credit ratings on Saudi Arabia would decline to speculative-grade in such a scenario, which is not our base case,” said Cullinan.

Saudi Arabia’s fiscal situation has worsened significantly since 2013 and future budgetary challenges now appear to be somewhat more aggravated than they were a few years ago. A major reason for this is the significant worsening in the sovereign’s budgetary position since 2013, with a general government deficit of 14 per cent of GDP in 2015, compared with a surplus of 7 per cent in 2013.

By Babu Das Augustine

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