Saudi Arabia to keep 'massive' spending despite oil price fall
Saudi Arabia will continue massive public spending despite a 50 percent drop in the price of oil, which provides the bulk of its revenue, the finance minister said Wednesday.
Ibrahim bin Abdulaziz al-Assaf commented after completing the 2015 budget, which will be presented to cabinet "in the near future", the official Saudi Press Agency said.
Financial analysts expect the budget to be approved as early as Monday.
The kingdom is the largest economy in the Arab world, and OPEC's biggest crude producer.
Assaf said the budget comes during "challenging" global economic conditions but surpluses and reserves built over many years have given it "depth and a line of defence that come in handy in times of need".
He said this policy will continue, enabling the government "to implement massive social projects" in health, education, social services and development as well as state security.
This spending, combined with private sector activity, is expected to bring positive economic growth, he said, without giving a figure.
Crude prices have fallen to multi-year lows since June in the face of a global supply glut and slower growth in demand.
Prices have plunged even further since last month, when the Organisation of the Petroleum Exporting Countries (OPEC) decided against cutting production.
Analysts have attributed the move to Saudi Arabia’s wish to hurt regional rival Iran and also mass energy exporter Russia, who are both key backers of Syrian President Bashar al-Assad, whom Riyadh would like to see toppled but who has so far endured against an almost four-year uprising against his rule.
The oil cartel pumps about 30 percent of global crude.
On Wednesday, US benchmark West Texas Intermediate crude for January delivery sank a further $1.16 in afternoon Asian trade, to $54.77. Brent crude for February shed 71 cents to $59.30.
This is well below the estimated breakeven price for most Gulf producers, which is needed to balance the budget.
In September, the IMF warned that Saudi Arabia risked falling into a budget deficit next year and may have to tap its reserves.
However, Riyadh has the world’s third largest foreign reserves – after China and Japan – and according Japanese finance ministry is estimated to have $683 bn on its balance sheet, which should allow it to ride out a sustained period of falling crude prices with relative ease.
Saudi Arabia had a nominal GDP of $748 bn last year, and reported a budget surplus of around $55 bn.
Fitch global rating agency also forecast Brent to average $83 a barrel in 2015 after $99 in 2014 but said that Saudi Arabia would not be hard hit.
“This will not cause major headaches for the ‘AA’ rated Gulf oil producers - Abu Dhabi, Kuwait and Saudi Arabia - which have accumulated large buffers,” Fitch said.
However, it will increase pressure on fellow OPEC member Bahrain, which has seen its economy hit by widespread unrest that erupted in the wake of the Arab Spring. Saudi Arabia and other Gulf Cooperation Council (GCC) countries have since offered multi-billion dollar loans to its struggling neighbour.
Riyadh-based Jadwa Investment likewise said in a report earlier this month that the government should be in a comfortable position to adjust to lower oil prices and avoid drastic spending cuts.
It highlighted "the strong sovereign balance sheet, with foreign reserves of more than 95 percent of GDP and a public debt of less than two percent of GDP".
Jadwa projected a fiscal deficit of 2.7 percent in 2015.
It said it expected global growth to recover next year, helping to pull up crude prices to around $84 a barrel.
"We think the government will maintain elevated spending", Jadwa said, forecasting real GDP growth of 3.4 percent in 2015.
British-based analysts at Capital Economics said a budget deficit "should be easily financed by issuing debt or drawing down savings. Overall, then, growth is unlikely to collapse as a result of lower oil prices."