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The government has sought to reassure Saudis that modernisation schemes are on track after fears of a global economic slowdown helped push oil prices down to around $70 a barrel this month from double that three months ago.
”Citizens should be sure that the country is moving calmly and all the coming days will be happiness and prosperity,” King Abdullah was widely quoted in state media as saying this week as plans were announced to set up a new women’s university.
Riyadh is now joining the queue of OPEC producers scrambling to hold up the price of crude at an emergency meeting in Vienna which started on Friday. Saudi Arabia has already begun to pare back production in line with expectations of lower demand.
But conservative fiscal policies will put the country in good stead to weather lower oil, with analysts saying the current year’s budget is based on a price of around $45-50 a barrel, while expansion next year will require around $55-62.
“I don’t think the finance crisis is as much of an issue as oil. In Saudi Arabia they already have measures to control credit,” said Monica Malik, economist at investment bank EFG-Hermes.
“As long as it’s above $60 Saudi Arabia be okay this year or next year, but if anything below will effect sentiment and the level at which the government can increase expenditure.”
Development plans could suffer not only from the fall in government revenues but also from tighter international finance for private sector projects.
YEARS OF SURPLUS
The kingdom, where citizens pay no tax but enjoy few political rights in return, has run budget surpluses in recent years allowing it to pay back debt, development infrastructure, silence opposition and maintain the ruling family’s spending.
Total spending of 410 billion riyals ($109 billion) in the 2008 budget was a 7 percent increase from the year before, covering areas like education, health, water, agriculture, roads and railways.
Despite the U.S. ally’s famed riches, many areas are underdeveloped with a lack of roads, sewage system and schools. Joblessness and poor education plague a country where equitable distribution of wealth remains a pipe dream.
Adel Al-Harbi, an editor of Al-Riyadh daily, said ordinary Saudis had no sense that the modernisation plans were under threat from falling oil or the finance crisis.
“Saudi budgets have not exaggerated the oil price and the government has said it wants a fair price for oil consumers and producers,” he said. “What assures us is that during the oil boom the government has not actively sought high oil prices.”
OFF-BUDGET SPENDING
Much development spending is not calculated as part of the budget, while the wealth of the Al Saud ruling family can overlap with the wealth of a state that carries their name.
The government has gone on a defence spending spree in recent years, but details are not made public.
State oil giant Aramco plans investments of $129 billion over the next five years to increase both domestic and international capacity across the energy sector, but here the major concern is credit availability, not oil prices.
Aramco typically only uses project finance for around 20-30 percent of funding for projects it undertakes alone, limiting exposure to tighter credit conditions, financiers say.
Big projects seen looking for financing in near future include joint ventures refineries in Saudi Arabia between Aramco and France’s Total and Aramco and ConocoPhillips. Aramco and U.S. Dow Chemicals were likely to look for finance toward the end of next year for their giant petrochemical complex at Ras Tanura.
Four “economic cities” being overseen by state investment body SAGIA are essentially private sector endeavours but the liquidity squeeze could put some of them -- slammed privately by some diplomats and analysts as white elephants -- at risk.
While the King Abdullah City near the Red Sea port city of Jeddah is progressing as a business project run by Emaar Economic City, others in remote places such as Jizan and Hail may have become even more unattractive for developers or equity traders.
Other projects that bore all the hallmarks of boomtown extravagance could go nowhere. A Riyadh Development Authority was set up last year to oversee plans for a financial centre, technology park and underground metro system.
Ordinary Saudis, facing a sharp rise inflation over the past year, are already sceptical about the daily announcements.
“I don’t think most people here actually spend a lot of time thinking about these megaprojects because they are so busy working to make ends meet,” said blogger Ahmed Al-Omran.
“The government should be careful about dealing with this situation because many people still remember the first oil boom with a lot of bitterness and regret,” he said, referring to corruption during the oil price hike of the 1970s.
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