Unchanged fiscal strategy for Saudi Arabia

09 February 2015

There had been expectations of sweeping changes to the kingdom’s economic strategy

Although King Salman bin Abdulaziz al-Saud may have made some highly politicised personnel changes to the Saudi government, analysts expect the fiscal positioning of the kingdom will be maintained through a widely agreed long-term economic strategy.

When the kingdom released a record budget earlier this year, it was clear the authorities were prepared to apply the rhetoric that the fall in oil prices is a short-term issue, which will not derail the long-term ambitions of the region’s biggest economy.

A report published in January by the local Jadwa Investment claims the biggest risk to a positive outlook for 2015 “stems from the external environment, such as a significant slowdown in the global economy and geopolitical tensions”, rather than the fall in oil prices and the kingdom’s market conditions.

The report goes on to predict economic growth will fall to 2.5 per cent in 2015, down from 3.7 per cent in 2014.

Speaking with Fahad Alturki, Jadwa Investment’s chief economist and head of research, it is understood this lower predicted rate of growth is unsurprisingly due to an anticipated contraction in the oil sector by 0.6 per cent.

The firm also expects non-oil growth to slow down as demand from abroad for manufactured goods such as petrochemicals calms due to lower oil prices. And although this may not directly affect the government’s fiscal budget, it does raise concerns regarding capital spending and private sector investment, which has been cut in the 2015 budget.

While general public spending has not been affected, it is expected that capital spending will decrease, with budgeted investment spending cut by 35 per cent to SR185bn ($49bn).

“Although this is the first time since 2002 that the government has reduced its budgeted investment spending, it was anticipated given the rapid growth in this type of spending over the past 10 years, which has averaged 25 per cent a year,” says Alturki.

He goes on to assert that the kingdom can afford to cut investment spending due to its commitment to the private sector over the past 10 years.

“The less talked-about factor about Saudi Arabia’s high spending is that it has created a better environment for the private sector to perform in, compared with 10 or 20 years ago,” says Alturki. “Even in the unlikely situation of the government cutting spending, the private sector has been sufficiently supported by the authorities in the past.”

Alturki dismisses any claims that the cut in budgeted investment spend is linked to the fall in oil prices. Instead, he attributes it to previous efforts to create a more sustainable private sector.

While the government’s pledge to cut capital spending is in line with the stance that the fall in oil prices is not going to affect its long-sighted economic strategies, other analysts have warned of the sentimental impacts of energy price fluctuations, at a time when the authorities are cutting private sector investment.

Since 13 January, prices have increased by more than 25 per cent from $46 a barrel to reach $58 a barrel on 9 February, and although analysts say the rebound may be short-lived, the rise has improved sentiment, which will further fuel the new government’s commitment to maintain its original fiscal strategy.

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