When Riyadh announced its annual budget in late 2013, commentators quickly pointed out that it was “only” a 4.3 per cent year-on-year increase, compared with an 18 per cent rise at the end of 2012.

While it is true the massive growth in public spending is now slowing down, the budget of SR855bn ($228bn) for 2014 still represents an all-time high for the kingdom. Most of it is earmarked for social projects and improving infrastructure.

The budget is also the first since 2005 that is balanced and will not produce a surplus. This is a strong indication that Riyadh is committed to pushing ahead with its unprecedented fiscal stimulus programme.   

Serious challenges

However, while there is money at hand to be spent on vital projects such as hospitals, schools and housing, as well as other initiatives to tackle spiralling youth unemployment, 2014 will still offer some serious challenges for the kingdom to overcome.

“This is a budget that proves Riyadh is serious about spending on things that are important to Saudis and while many countries are cutting spending, the kingdom is increasing it,” says Fahad Alturki, head of research at the local Jadwa Investment. “But there are several sectors reaching full capacity in the kingdom and this may cause progress on some of these initiatives to slow down over the next 12 months.” 

This is a budget that proves Riyadh is serious about spending on things that are important to Saudis

Fahad Alturki, Jadwa Investment

In its budget analysis published in December, Jadwa said the foundations for the 2014 spending plan were laid in 2013 being a “healthy” year for the Saudi economy. The kingdom enjoyed GDP growth of 3.8 per cent and non-oil growth increased by 5.5 per cent, buoyed by the transport, communications, construction and manufacturing sectors. Oil revenues pushed government income to $301bn, exceeding $300bn for the second successive year.

Five key sectors will be the main recipients of spending in 2014 aside from defence and security, the figure for which is not disclosed.

Education and training has been allocated SR210bn, which is a 3 per cent increase on 2013 and 24.6 per cent of the overall budget. This will be split between capital spending on 465 new schools and completing 1,544 school projects already under way, as well as funding the refurbishment of 1,500 existing schools. Eight new colleges will also be built and women’s colleges in existing universities will be expanded and refurbished to attract new students.

Out of the education budget, SR22bn has been ring-fenced in order to fund the education of 185,000 Saudi students abroad. “Riyadh understands that education is the key factor for tackling youth unemployment,” Alturki says. “There is no use investing billions of dollars on an industrialisation programme if there are no Saudis to fill the roles that are created.”

Social spending

Healthcare and social affairs is also high on the kingdom’s agenda and 2014 will witness an 8 per cent increase in funding to SR108bn, which is 12.9 per cent of total spending. New schemes detailed in the budget include 11 hospitals and 11 medical centres, as well as two medical complexes.

As well as medical facilities, social well-being has been pinpointed by Riyadh as essential to keeping citizens healthy. To achieve this, 20 new sports complexes will be built, along with 16 social and rehabilitation centres. The total budgeted cost for these schemes is SR29bn.

Municipal services will witness a 9 per cent increase in funding in 2014, the highest of any sector

Due to the vast geographical area of Saudi Arabia, transport and infrastructure will play a vital role in the kingdom’s long-term future. As a result, it is the recipient of the third-largest disclosed budget allocation of SR66.6bn, a year-on-year increase of 2.5 per cent.

A series of new infrastructure schemes are either planned or under construction, spread across the length and breadth of the kingdom. In particular, roads are undergoing major expansion programmes and refurbishment. Riyadh is building 3,500 kilometres of new roads, with another 1,360km in the planning phases.

Regional projects tracker MEED Projects says more than $10bn-worth of road schemes are under execution, as well as $960m at the pre-execution phase.

When other transport schemes such as rail and metro systems are included, total planned spending rises to $90bn, according to MEED Projects.

Food security and municipality services make up the last two major beneficiaries of the 2014 budget. Water and agriculture will be allocated SR61bn to fund the roll-out of new agricultural projects, silos and desalination units. Investment in utilities infrastructure will also be made.

Municipal services will witness a 9 per cent increase in funding in 2014, the highest of any sector. A total of SR39bn will be spent on various services aimed at improving the kingdom’s towns and cities.

Construction spending

What is clear is that the vast majority of Riyadh’s budget is tied up in construction schemes. In many ways, this is a positive step towards providing hundreds of thousands of employment opportunities across the kingdom, but it also means an enormous strain will be put on resources as rival schemes vie for both personnel and raw materials.

Many experts in the kingdom believe full capacity for raw materials and personnel has almost been hit and that further project spending will result in the delay of some of the key schemes planned by the government.

However, cement production is expected to rise by 25 million tonnes by 2017, which should improve availability, and other vital raw materials such as steel can be imported from abroad.

The kingdom’s main challenge lies with human resources and the implementation of the Nitaqat programme, aimed at raising Saudisation levels in private sector companies. Nitaqat has been introduced in order to curb the vast numbers of expatriate workers in the kingdom and create more jobs for Saudi nationals, among whom unemployment rates are as high as 50 per cent.

There are wildly differing claims about the number of expatriate workers that have been deported under the programme, with figures ranging from 75,000 to 1 million. Many of the freed-up positions are in sectors such as construction, retail and transport, three of the kingdom’s fastest-growing sectors. The Nitaqat scheme has not been without its critics, who argue that many of the positions would not be desired by locals.

“Let us be honest about this, there are some jobs that very few Saudis would consider doing,” says Abdullah Alawi, head of research for the local Aljazira Capital. “Some of the salaries on offer would be too low for a Saudi national to consider and unless this kind of disparity in wages can be addressed, you are only ever going to be able to fill these roles with expatriate workers.”

Many of these low-paid jobs are to be found in the construction sector and while they are unskilled, they still make a vital contribution to the industry. Without labourers, drivers and security staff, projects could be severely delayed, especially in areas of high activity where construction workers are in plentiful high demand.

Some of the solutions offered by economists such as Alawi and Alturki include Riyadh offering subsidies to private companies in order to pay higher salaries for certain positions, as well as offering exemptions for some unskilled roles that have an almost zero chance of attracting Saudi nationals.

Declining revenues

Looking to the mid term, 2014 is likely to be the last year for some time when government spending is increased. Riyadh has estimated that revenues this year will drop by 25 per cent to about $225bn due to falling oil production and lower crude prices. Despite the investment in industrial diversification, the kingdom still relies on oil for 90 per cent of its export revenues. Consequently, spending is expected to fall accordingly.

Despite these various challenges, GDP growth of 3.6 per cent is still expected for 2014, with the non-oil sector growing by 5.2 per cent. This is significantly higher than average OECD forecast growth of 2.3 per cent. 

However, there is no question that the vast majority of the kingdom’s growth is linked to the fiscal stimulus put in place by the government. The huge oil revenues generated in the past two years are set to subside and 2014 could be the last year where such largesse remains affordable for the foreseeable future.