The Kingdom of Saudi Arabia has gone into an austerity mode. This has been necessitated by the falling oil prices and the realisation that tough changes to spending must be made to survive lean periods. As global oil surplus reaches an all-time high, it is expected that the period of austerity will not be a short one.
The government has been meeting the challenges through several avenues. These include shelving some major projects with costs projected in the billions, reviewing financial returns on existing and committed projects and reducing certain benefits and allowances from the paycheques of sizeable state employees. Private companies have followed suit and have slashed financial perks that had substantially padded their workers’ salaries in the past.
The Saudi citizen for the most part had long been accustomed to unrestrained spending in the wake of never-ending bonuses and pay raises. But as this bounty is increasingly drying up, many Saudis are finding out that a wasteful lifestyle cannot be sustained under the current economic conditions. Some have reacted sensibly, doing away with much of their previous carefree spending habits. Others have also tightened their belts considerably. But there are still others who are finding themselves somewhat lost and bewildered in the face of such changes.
In a recent survey regarding the personal finance culture in Saudi Arabia, conducted by the Riyali Financial Literacy Group in collaboration with Souqalmal — the leading financial comparison site in the Middle East with operations in Saudi Arabia, Kuwait and the UAE — 86 per cent of the Saudis responding to the survey admitted that they were suffering from “financial distress”. The survey, reported in a local daily, also indicated that “most of the financial commitments that the participants failed to fulfil were in the form of instalments (44 per cent), followed by borrowing from friends and family (34 per cent) and credit card payments (22 per cent). Such a high percentage of failure to fulfil debt obligations usually has several consequences, including a bad credit history that affects the borrowers’ ability to obtain further financing”.
Adding to the misery, the survey also revealed another potentially perilous financial issue — ‘debt to income (DTI) ratio’. For those unfamiliar with the term, debt-to-income ratio is all of one’s monthly debt repayments divided by their gross monthly income. This figure is one method that lenders use to measure an applicant’s ability to manage his or her monthly payments. Actual studies of mortgage loans suggest that ‘borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments’. As a benchmark, most financial analysts agree that a 43 per cent DTI ratio is the highest that a borrower can have without being snowed under and defaulting on his financial commitments. This ratio is a major factor in determining the eligibility of an individual to obtain finance and to ensure that one’s monthly debt burden does not exceed his or her repayment capacity.
The survey revealed that in more than 40 per cent of the participants, monthly debt burden exceeded 60 per cent of their salary, leaving the respondent and his or her family with less than half his monthly earnings to survive on. This is not a comfortable situation to be in and without external intervention and financial infusion, an individual would soon find himself running out of funds — or to put it simply, will end up robbing Peter to pay Paul as he or she goes about using yet another newly-acquired credit card to pay off old debts — thereby falling deeper into a dent trap.
The Kingdom’s central bank, the Saudi Arabian Monetary Agency (Sama), has capped the monthly debt burden at 33 per cent. The debt burden ratio may vary from one customer to another based on the financial products held. Sama also recently reported that “the appropriations allocated for covering bad debts exceeded 165 per cent of total non-performing loans”.
To help address the growing concern resulting from this recent survey, a senior executive at the holding group that sanctioned the study said: “We have provided through the Riyali Programme, a wealth of financial awareness courses and tools to help individuals act responsibly with regard to borrowing and credit history, in addition to saving and planning for investment. The optimal method of personal financial management requires self-consciousness and the individual’s desire to develop financial awareness. We, at Riyali, provide this for the sake of a better future and a more stable life and happiness of the individual and community.”
Let us not forget that the first step towards ensuring that one doesn’t fall into a financial hole is by beginning belt-tightening at home.
Tariq A. Al Maeena is a Saudi socio-political commentator. He lives in Jeddah, Saudi Arabia. You can follow him on Twitter at www.twitter.com/@ talmaeena.
