Saudi investment to slow down

Saudi Arabia will continue to pump large funds into development projects because of strong oil prices but growth in such expenditure is expected to slacken in the coming years, a key bank in the Gulf Kingdom said.

Capital spending this year will remain high as several projects which were delayed in 2012 will be implemented this year but growth in investments will be slow than in previous years, Saudi American Bank group (SAMBA) said in its monthly bulletin.

“These projects should help to keep real nonoil growth in excess of five percent this year….nevertheless, it was notable that investment spending by the central government contracted in 2012. We do not believe that investment spending will be cut again in 2013, but we do think that much weaker growth in central government investment spending will be the pattern for the next few years,” it said.

“On one level, the government’s fiscal position is extremely robust. Oil prices are currently around $110/barrel (Brent) and although oil production has been trimmed, we expect some SR960 billion of oil revenue this year.”

SAMBA said Saudi Arabia had slashed its crude output by a whopping one million bpd this year to just around nine million bpd.

Its oil revenue estimate for 2013 is far below the Kingdom’s 2012 crude export earnings of SR1.3 trillion, their highest level since it began exporting oil more than 70 years ago.

“The level represents a decline on 2012 but is still some 41 percent higher than oil earnings in 2010, for example. Moreover, years of high oil prices have allowed the authorities to build up savings, which currently exceed 100 percent of GDP,” it said. 

“So why do we think that government investment growth will slow… the answer relates to both the magnitude and structure of government spending over the past decade.” 

SAMBA said that since oil prices began their rapid rise in 2003, real government spending has increased its share of real GDP from around 38 percent to some 63 percent in 2012. It said the increase was coupled with a rise of around $20 in the “breakeven” oil price—the minimum price to achieve fiscal balance—from around $20/barrel (Brent) in 2003 to some $87/b in 2013.

“This in turn speaks to the build-up of spending commitments made by the government over the intervening decade: for example supposedly one-off salary adjustments made for inflation, increases in subsidy spending to counter rising food inflation, and the extension of unemployment benefit—again, ostensibly conceived as a time-limited measure, but recently extended,” it said.

“These spending commitments are easily made in an environment of high and rising oil prices, but difficult to unwind for political reasons. Capital spending (that is, investment) is much easier to rein in or reduce.”

SAMBA said it believed the Saudi government might decide to keep spending high and fund any deficits that might materialize by drawing down savings, as it did in 2009.

“But we think that last year’s cut in capital spending is instructive: the government is well aware of the shifting fiscal equation and knows that drawing down savings does not provide a long term solution,” it said.

“ Rather, we think that it will continue to keep capital spending growth in check, with an annual growth rate of some 3-4 percent in the next few years, as compared with the double digit growth registered in the previous decade.”

Follow Emirates 24|7 on Google News.