With oil prices set to remain at about the $60-a-barrel mark for the foreseeable future, the prognosis for Saudi Arabia’s main revenue generator suggests austere times are on their way in the region’s largest economy.

The kingdom relies heavily on oil revenues and many observers have expected Riyadh to adapt and factor in the prevailing economic conditions. However, a historically high budget of $229bn was set for 2015, with expected revenues of only $190.7bn.

High spending

A deficit of $38bn was forecast, and media reports have stated that due to the recent military forays into Yemen, Riyadh is burning through its $736bn of foreign cash reserves far faster than anticipated. This, added to the billions of dollars committed to social infrastructure projects, means that despite the low oil prices, much of Riyadh’s high spending is locked in for now.

This does not mean the newly crowned King Salman bin Abdulaziz has an endless mountain of cash to spend on vanity schemes. The monarch, who ascended to the throne following King Abdullah’s death in January, has initiated several measures aimed at reining in non-essential spending. A swathe of cost-cutting measures have been introduced, with several councils and committees being abolished, much to the dismay of the scores of bureaucrats sitting on them.

According to regional projects tracker MEED Projects, Saudi Arabia has more than $120bn-worth of non-hydrocarbon projects at the design and main contractor bid stages as of May 2015.

It is almost certain that many of these schemes will be postponed or will see the initial first phase lowered to a more affordable level in order to cut costs and manage cash flow.

Exactly where this will happen is hard to determine, but some sectors will remain almost free of cost-cutting measures, while others will be expected to cut capital spending and lower costs to accommodate this.

One area where King Salman is arguably far more aggressive in his recent decision-making is the defence sector. Although Riyadh does not publish its defence budget, estimates from reputed analysts such as US-listed research company IHS put the figure at about $80bn, behind only the US and China.

With Riyadh leading a military coalition to fight Houthi rebels in Yemen, there is no realistic chance that this will be reduced in the near future. The likelihood is the kingdom will spend more.

Not only will investment in conventional weaponry, such as fighter planes and helicopter gunships, need to be ramped up, but large sums will also have to be spent on counter-terrorism hardware. This has led IHS to forecast that Riyadh’s spending on foreign defence equipment will rise by 54 per cent in 2015, to $9.8bn.

These numbers are not expected to slow down in 2016 either, with high-investment levels witnessed across a number of defence spending sectors.

Social infrastructure

Riyadh is locked into several extremely expensive initiatives aimed at improving the country’s social infrastructure, and this largesse is not going to stop in the short-term.

The government accepts that downing tools on the medical centres, universities and social housing projects under construction across the kingdom would be a grave mistake and would endanger the welfare of future generations.

It is also using this public spending to send a clear message to the private sector that the kingdom is well and truly open for business. Historically, the private sector becomes extremely jittery when oil prices drop, so a clear sign that investment will continue should quell any fear of the financial taps being turned off.

Proposed government spending in 2015 is the equivalent of 36.3 per cent of GDP, compared with an average of 31.9 per cent over the past 10 years. The local Jadwa Investment stated earlier in 2015 that the economy will continue to perform strongly this year, especially its non-oil sectors. Nonetheless, growth will be slower paced than in previous years at 2.5 per cent, compared with 3.7 per cent in 2014.

The 2015 budget has also cut investment spending by 35 per cent to $49.2bn in 2015, the first reduction since 2002. Capital investment has been growing by 25 per cent a year for the past decade, a figure that was unsustainable in the long term. The $49.2bn figure still represents a 36 per cent increase on five years ago, but is a clear indication that some caution remains.

Education has been allocated $57.9bn as Riyadh maintains its commitment to the huge capital spending programme on schools, universities and vocational training centres. The budget includes funding for 164 projects, with a combined budget of $3.7bn, and this will add to the $74.7bn from previous allocations.

Health and social affairs are receiving $42.7bn from the new budget, which includes both civil and military healthcare provisions. Riyadh is committed to providing 24,000 beds at 117 new hospitals, as well as a further 14,500 at medical cities across the country. 

Preventative measures are also being taken with lavish spending on social welfare, a move intended to prevent any echoes of the discontent that saw Arab nations rise against their rulers in 2011. This includes 16 new sports clubs as well as five new centres for Saudis with special needs. Poverty eradication programmes will benefit from a special appropriation of $8bn.

Significant slowdown

General infrastructure projects, such as transport and power and water schemes, may suffer a significant slowdown in some non-essential areas.

Building world-class transport links is seen as a vital component of Saudi Arabia’s growth, but some of the rail, airport and road schemes are so large they will likely be extended for a few years or built in more phases to manage cash flow.

Spending on conventional power and water schemes should be somewhat slower than in previous years, but the prospects for the sector remain positive. Sewage treatment plants and renewable projects will be the major casualties.

With oil revenues so drastically reduced, Riyadh has had to look to other sectors for cuts, and hydrocarbons is one area where belts are being tightened.

One of the first decisions state-owned Saudi Aramco made in 2015 was to postpone the $3bn Ras Tanura refinery upgrade. The energy giant has put off spending on gas projects, where it has schemes planned that total about $10bn.

Riyadh’s strategy to maintain high oil production and maintain market share also means that Aramco will have to continue spending money in order to keep the crude flowing.

Considering that Riyadh relies on oil for 90 per cent of its revenues, Saudi Arabia is one of the countries least affected by lower oil prices, due to the vast cash reserves built up over the past few years. This means that, despite overspending concerns, there are still plenty of funds available for the key sectors.

However, oil prices are not expected to recover to early-2014 levels until at least the turn of the decade, so while the current crop of world-scale schemes will be finished, a period of consolidation until 2020 can be expected.

The much-anticipated opening to foreigners of the Saudi Stock Exchange, the Tadawul, came and went on 15 June with a whimper rather than a bang.

Instead of seeing a massive influx of trading as soon as the gates were opened to direct foreign investors for the first time, the exchange closed down 0.9 per cent at the end of trading that day.

Analysts had warned that foreign capital would be slow to enter a slightly overvalued market. It could take months, or even years, to be felt. Low oil prices, summer and Ramadan will also play a part in tempering speculation. However, the region’s richest market should mature over time at a conservative pace.