Saudi Arabia: Budgeting for a slowdown

18 December 2012

Riyadh’s budget for 2013 will show another hike in spending and good economic fundamentals that will benefit the private sector, but is it enough?

By the end of December, Saudi Arabia is expected to announce its budget for 2013. While the budget will undoubtedly continue the trend of happily ignoring the reality that both spending and revenue normally far exceed what is announced, it will give an indication of where Riyadh’s priorities will lie over the next 12 months.

Economists expect the budget to reveal an increase in expenditure of about 8-10 per cent from actual spending levels, which would put total spending at a little below SR1 trillion ($267bn) in 2013. The headline figures for the Saudi economy all look strong. Growth in 2013 is forecast at about 4 per cent by most analysts, the budget will be in surplus and foreign reserves are set to rise to more than $700bn.

Significant role

Despite this, several headwinds confront the kingdom’s economy. Recent third-quarter gross domestic product (GDP) figures show the economy is being driven by the government sector, and that growth in the private sector has been slowing.

Public-sector growth in the third quarter was 12.2 per cent compared with the same period in 2011, while private-sector growth was 5.1 per cent. Compared with the second quarter, the private sector shrank 1.7 per cent in the third quarter. Total GDP growth in 2013, while robust, will be slower than the roughly 6 per cent growth expected in 2012. In 2014 it is expected to ease further.

Further spending rises for 2013 will boost confidence in the kingdom. The private sector, however, will need to start playing a more significant role in the economy soon if unemployment is to be addressed and the government is to avoid continuing to expand its payroll.

James Reeve, an economist at local bank Samba, says that by 2015, the rate of spending could actually begin to reduce. If this occurs, he says the cuts are most likely to impact capital investments in infrastructure, rather than current spending, which includes the public-sector wage bill. “Overall, capital spending could be reined, while cuts in current spending are unlikely, particularly given political sentiment in the kingdom and across the region,” says Reeve.

A slowdown in headline growth figures for the kingdom will be driven by declining government revenue growth as oil production and prices fall respectively, while the non-hydrocarbons sector continues to grow at 6 per cent.

Shifting the emphasis to the private sector is a key policy goal for Riyadh, which sees it as a way to make the country more competitive, reduce joblessness and lower its wage bill. The Ninth Development Plan, which sets out specific targets for growth between 2010 and 2014, is particularly ambitious. Riyadh had set out the plan for annual growth in that period to average 5.2 per cent and for average private-sector growth to be 11.8 per cent.

Cuts in current spending are unlikely, particularly given political sentiment … across the region

James Reeve, Samba

While the private sector is well below that figure, there are encouraging signs that activity is picking up. Private-sector credit growth has reached double digits each month for the past year, marking a significant recovery since the end of 2009, when it was flat. Industrial diversification is starting to pay off. Jaguar Land Rover, the Indian-owned car manufacturer, said in December that it was considering building cars in the kingdom. This is exactly the kind of industry Riyadh wants to attract, presenting an opportunity to both sell aluminium from a new smelter in Ras al-Khair, and to create jobs. Figures for ATM withdrawals and point of sale transaction also indicate consumer confidence is high.

“The private sector is a long-term story,” says Simon Williams, chief economist for the Gulf at the UK’s HSBC. “Growth now is being driven by recycling of oil rents and increasing capital spending, not from any growth in productivity or competitiveness.” That leaves room for plenty of growth in the future simply by becoming more efficient.

Room for improvement

Recent private-sector growth figures are also affected by comparison to the third quarter of 2011, when the private sector expanded 8.8 per cent. “Despite the moderation in activity, private-sector growth remains robust, supported by public-sector investment, strong domestic demand and rising bank lending,” noted Fahad al-Turki, senior economist at the local Jadwa Invesments, in a recent report.

In the short-term, the private sector should continue to pick up, but if Riyadh does start to take action on spending, it will hit confidence, particularly as much of the private sector indirectly benefits from state spending.

Although the private sector is performing well, Riyadh needs it to grow much faster over the next few years if it is to have a significant impact on job creation and help to reduce the burgeoning wage bill.

Key fact

Riyadh plans for Saudi private-sector growth to average 11.8 per cent between 2010 and 2011

Source: MEED

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