Saudis to slow spending to lowest pace in a decade

Construction workers on a development site on King Abdullah Road in Riyadh. Fahad Shadeed / Reuters

Saudi Arabia plans to slow its spending to the lowest pace in more than a decade next year as the government responds to warnings that high expenditure risks running down oil wealth for future generations.

The impact of the budget, announced by the finance ministry this week, is likely to be closely watched by regional contractors as the kingdom scales back the pace on large building projects.

The 4 per cent rise in total budgeted spending to 855 billion riyals (Dh837.4bn) compares to a 5.9 per cent increase in actual expenditure during the current fiscal year.

The budget’s 248bn riyals earmarked for capital expenditure is around 13 per cent down from this year, the first time in 12 years that the government has trimmed planned spending in that area.

“The clear message this budget is giving is that Saudi Arabia is trying to balance supporting growth in areas where the private sector is less active while maintaining medium-term fiscal sustainability,” said Monica Malik, the chief economist of EFG-Hermes, the Egyptian investment bank.

“There’s a recognition Saudi Arabia has to moderate the rate of spending growth, although the budget is still expansionary.”

The government rolled out a record fiscal stimulus in 2009, first to help to counter the effects of the global financial crisis and then in 2011 to ward off regional social unrest. As a result, spending this year was 78 per cent up from levels of five years ago.

The IMF warned the kingdom earlier this year that overspending was threatening the preservation of oil wealth for future generations. It also said that the budget could slide into deficit by 2016 if spending continued to accelerate.

Under the budget for next year, current spending will continue the growth of recent years, up by 13 per cent to 607bn riyals. Much of that outlay is made up of payment for wages and salaries after the government handed out public-sector pay rises in 2011.

The slowdown in capital spending could further hurt the GCC’s largest construction market.

Many companies have already been impacted by labour and raw material shortages stemming from the government’s recent crackdown on illegal workers.

“This is a dampener on top of those more immediate issues for contractors,” said an analyst at a regional investment bank.

The UAE-based Drake & Scull International has nearly half of its project backlog in Saudi Arabia. Arabtec, the region’s biggest contractor, is working on several projects in the kingdom including a 105-bed hospital in Riyadh. Neither contractor was available to comment yesterday.

Total Saudi state spending next year is still expected to overshoot budgeted levels, as it has for the past decade. Revenues – 90 per cent of which come from oil - are also likely to be higher than the 855bn riyal forecast.

But the budget suggests policymakers are cautious about the outlook for the oil market next year. For the first time since 2005, the government has forecast a balanced budget, rather than a surplus for next year. This year’s surplus is expected to be equivalent to 7.3 per cent of GDP.

Commodities including oil are expected to face downward pressure next year as the Federal Reserve in the United States scales back its economic stimulus programme.

“Lower crude oil prices and reduced production might materialise, with the increased possibility of oversupply from Opec and non-Opec, which will weigh heavily on oil revenues and will reverse the hefty fiscal and current account surpluses of recent years,” wrote economists at NCB, the Saudi Arabian bank.

However, substantial net foreign assets would help to act as a buffer to any global shocks, the bank added.

Fahad Alturki, the head of research at Jadwa Investment, the Saudi Arabian investment bank, said the budget would require prices of North Sea Brent to about US$85 per barrel in order to break even next year. The bank forecast Brent crude prices to average $104 per barrel next year, down from $110 so far this year.

As consistent with the government’s policy of creating jobs and diversifying the economy, nearly a quarter of next year’s spending will go towards education and training.