Ed Attwood looks at how yet another expansionary budget means that Saudi Arabia will keep on investing billions at home. It looks like the right move for the short term, but is this policy sustainable?
If anyone believed that 2013 would be the year that Saudi Arabia would rein in its colossal spending plans, then the recent budget announcement will have had them scratching their heads. On 29 December, the government confirmed that it would raise spending by 19% in 2013 to $219bn – making that hike the highest nominal increase in spending since records began.
The trend follows several years of expansionary budgets as the Saudi authorities attempt to stimulate the economy. Looking at the results for 2012, the plan appears to be working.
Preliminary data for last year show that Saudi real GDP rose by 6.8%, with non-oil GDP – a vital sector given the country’s attempts to diversify away from hydrocarbons – growing by 7.5%. Last week’s announcement also corrected the previous GDP growth figures for 2011, which have now risen from 7% to 8.5%, the highest increase since 1979.
The government has also projected revenues for 2013 to come in at $221bn, although – as ever – this is a conservative figure, and based on a predicted oil price that is likely to be much lower than the actual price (around $70 for Brent, according to Jadwa Investment).
For example, Saudi Arabia forecast its 2012 revenues at $187bn, but an oil price that hovered around the $110 mark during the year saw the actual figure rise to $331bn. As a result, Jadwa predicts that actual revenues this year will amount to roughly $310bn, based on an average Brent price of $104 in 2012.
Those higher-than-planned revenues left the Saudi budget sitting on a healthy surplus of SAR386bn, or just over 14% of GDP, in 2012. In the same vein, another strong surplus is expected in 2013.
While the Ministry of Finance puts this surplus at only $2.4bn, owing to the conservative nature of its oil price projections, NCB Capital thinks a more realistic sum is SAR 277bn. In terms of GDP growth, the Jeddah-based investment bank says the figure for this year is likely to be around 3.4%, mainly due to slower growth in oil production.
“However, this contraction in the oil sector will largely be offset by the non-oil sector, which is expected to grow by 7.4%, the second highest on record, driven by the private sector, mainly manufacturing and construction,” said Said Al Shaikh, NCB Capital’s group chief economist, in a research note.
Even at growth of 3.4%, Saudi Arabia’s economy will be the envy of most other large countries. That figure is above the average expected GDP (3%) of the G20 nations – of which the kingdom is one – according to Moody’s. And, waiting in the wings, is Saudi Arabia’s vast foreign reserves, which by October had amounted to a colossal $628bn, an impressive 17% increase on end-2011.
That sum can easily alleviate any short-term problems that may occur if the global economy hits the buffers next year, or if the oil price slumps unexpectedly.
However, the concern for Saudi Arabia lies not in 2013, but further down the line. The fear is that the spending to which the kingdom is fast becoming accustomed will be more difficult to justify in around five years’ time.
In October last year, the International Monetary Fund (IMF) warned all the GCC nations that the pace of government spending needed to be scaled down to “ensure long-term sustainability” in the face of weakening oil prices.
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