Rising Gulf spending


Saudi Arabia, which recently unveiled an expansionary budget for 2013 with public spending of USD219-billion is stepping on the gas to meet rising infrastructure needs. “Budgeted capital spending is 28% higher than in 2012, though the government has struggled to achieve its capital spending targets in recent years,” said Fitch ratings agency in a note. “Education and healthcare remain the focus of spending, accounting for 37% of the total. Defence and security tends to be the largest single item, constituting around one-third, but is not disclosed in the budget.”

If recent history is anything to go by, actual spending will above budgeted level, says Jadwa Investment.  The government’s actual spend has been an average 24% higher than budgeted in the past ten years.

HSBC expects the good times in Saudi Arabia to continue as triple-digit oil prices will continue to ensure surpluses, although growth will moderate from 5.3% in 2012 to 4.3% in 2013 and 3.7% in 2014. “The surpluses should persist despite further growth in public spending, which we expect to exceed USD275bn in 2014 – roughly double the 2008 total and three times the level recorded in 2005,” said HSBC economist Simon Williams, in a report.

“This highly expansionary fiscal stance will be the core driver of growth in the non-oil sector, boosted by the expansion in domestic credit and the acceleration in household formation associated with the kingdom’s overwhelmingly youthful population.”  However, the public outlays means the Kingdom’s budget breakeven oil price to over USD95 per barrel in 2014, according to HSBC, which could hurt the government if crude prices fall for a sustained period of time.

Meanwhile, Fitch projects that the Kingdom’s breakeven oil price will rise to USD74 b in 2013 (assuming oil production of 9.7 million bpd) up from USD68 per barrel in 2012 and just over USD40 per barrel in 2008. While the economic prospects look rosy, the political aspects are cause for concern.

“Political risks will continue to weigh, as regional tensions persist and uncertainties over succession within the kingdom come into focus,” said Mr. Williams. “More broadly, policymakers are aware that they must look to accelerate and deepen the build-out of the non-oil economy and reduce dependence on oil if Saudi Arabia’s long-term prosperity is to be assured.”
Meanwhile, it is also important to remember that the economy remains heavily dependent on government spending.

“This spending will be affordable, but the economic growth such vast spending will generate will not be spectacular,” says Jadwa’s Mr. Turki in a report.