Oil and healthcare ribbon with oil pumps and beautiful sky

Since oil prices began falling in November 2014, Saudi Arabia has opted for a rather unorthodox strategy of focusing on maintaining its oil market share rather than scaling back production. While such a strategy would be risky to many countries, the Saudi government’s cash reserves, valued at more than US $600 billion in November 2015, had made it feasible. In recent months, however, Saudi Arabia has been exploring other, more traditional avenues to reduce the economic toll of falling oil prices. Several austerity measures have been suggested in 2016 as means to reduce the Saudi budget deficit which ran at U.S. $98 billion in 2015. In an unprecedented move, Saudi Arabia – a country that has been traditionally known to be a “tax haven” – has agreed along with the other 5 Gulf Cooperation Council (GCC) countries (Kuwait, Qatar, Bahrain, UAE and Oman) to begin implementing value-added tax (VAT) on various products in 2018. Additionally, the Saudi government has proposed putting up initial public offerings (IPOs) for some of the multitude of state-owned public corporations such as ARAMCO, the largest oil producing company in the world. Fuel and electricity subsidies have also been cut by the government in hopes of collecting additional revenue that will reduce budget deficit in upcoming years.

With austerity measures being implemented across various sectors, one cannot help but wonder what effect, if any, such cuts will have on the healthcare sector. An examination of the 2016 Saudi Arabia budget can help provide an answer. A comparison of the year-to-year change in budget reveals that modest but potentially significant cuts were applied to the Health and Social Development allocation over the past year. Budget allocation for Health and Social Development fell from US $42.66 billion in 2015 to US $28 billion a year later. While this represents a 34% cut, other less essential sectors such as Municipality Services and Infrastructure and Support faced stronger austerity measures as they were cut by more than 50%. It is clear from these strategic cuts that the Saudi government is committed to protecting essential sectors, such as health and education, during economic hardship. When viewed in context of politics in the region, protection of healthcare services in Saudi Arabia is imperative to stability as many of the recent civil uprisings in the region have been motivated by low levels of social services (health, education, etc.).

Without a detailed budget breakdown from the Ministry of Finance, it is difficult to assess how these cuts will be reflected in the real world. Nevertheless, one can reasonably expect a slowdown in the development of new healthcare facilities. Expansion plans for medical cities and additional hospitals will likely be delayed although not completely scrapped. Additionally, government support for treatments conducted outside of Saudi Arabia could be reduced in favor of bolstering the domestic system. On the other hand, outbound medical tourism, supported by out-of-pocket funds, is predicted to rise as tightened budgets limit the number of high-cost medical treatments the public sector can afford. At first sight, it seems that low oil prices will present challenges to the growth of the healthcare industry in Saudi Arabia. While this may be true for the public sector, the private sector has a potential to expand. The private sector can flourish as it is presented with an opportunity to fill the gaps that are left by the public sector during times of increased frugality. An aging population, coupled with an increasing burden of lifestyle diseases, will drive the demand for specialized health services from the private sector. With this in mind, one can expect the proposed healthcare system reforms in Saudi Arabia to gain more momentum. A shift away from the current system characterized by public financing and public delivery towards a public financing/private delivery model could prove to be the ideal choice. Increased involvement of the private sector in the delivery of care can be effective at reducing the cost burden on the Saudi government during times of reduced revenues.

The current oil glut is not only an economic affair but also a geopolitical one that is shaped by antagonistic relationships with other oil producing nations such as Iran. The complexity of this matter can be cause for concern for investors and businesses in Saudi Arabia. During such times of economic uncertainty, the Saudi Monetary Agency’s stance on maintaining the Riyal’s currency peg against the U.S dollar will help alleviate these concerns. Other positive news for the industry includes the government’s target to increase non-oil revenues by 29 percent in 2016. It remains, however, important to consider the impact of potential policy changes on doing business in the country. Will personal income tax be levied on Saudi Nationals or will foreign businesses face harsher tax rates? Will VAT be levied on pharmaceuticals or will medicine receive an exemption status similar to that of food products? While these questions cannot be answered with certainty at the present time, keeping up with the latest developments in the Saudi healthcare and pharmaceutical sectors will be key to identifying any possible growth opportunities.

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