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Saudi Arabia lifts state spending

Dubai: Saudi Arabia will lift state spending to a record in its 2015 budget while covering a deficit with its huge fiscal reserves, the government said, providing the first detailed look at how the world’s top oil exporter aims to handle an era of cheap oil.

Saudi Crown Prince Salman bin Abdulaziz and Finance Minister Ibrahim Al Assaf talking at a cabinet session in Riyadh to approve the state’s budget for 2015. — AFP

Financial markets had feared the kingdom might slash spending. But the budget, released by the Finance Ministry on Thursday, suggests authorities are confident of their ability to ride out low oil prices and see no need for major austerity.

Some analysts believe Riyadh is content to see oil prices fall as a way to squeeze out competing producers in non-Opec nations. The budget figures imply it could pursue this strategy for years if it felt that was necessary.

“The message of the budget is, ‘it’s business as usual’. They have the will and fiscal capacity to power the economy,” said John Sfakianakis, a former adviser to the Finance Ministry who is regional director of asset manager Ashmore in Riyadh.

Spending in the 2015 budget is projected at a record SR860 billion ($230 billion), up 0.6 per cent from SR855 billion in the 2014 budget plan — the smallest rise in over a decade.

Revenues are projected to drop to SR715 billion in 2015 from SR855 billion in the 2014 plan, leaving a deficit of SR145 billion. That would be about 5.1 per cent of the ministry’s estimate of the 2014 gross domestic product.

In the last six months, Brent crude oil has tumbled from around $115 a barrel — a level at which the kingdom was raking in giant budget surpluses — to just above $60.

But government reserves at the central bank, built up over the last four years of ultra-high oil prices, totalled SR905 billion in October, enough to cover deficits of the size projected in 2015 for about six years. That excludes the government’s other assets and its ability to borrow.

Saudi Arabia will continue spending actively on economic development projects, social welfare and security despite the oil price slide and challenging conditions in the global economy, the ministry said.

Saudi Arabia did not reveal the oil price assumed in its budget. Monica Malik, chief economist at Abu Dhabi Commercial Bank, said it seemed to be assuming oil at $55 and Saudi output broadly unchanged at 9.5 million barrels per day.

“Saudi Arabia is in a strong position to fund its deficits... It could afford the new oil price for a year or even two,” she said, adding that if oil stayed low for longer, the government would probably have to start reining in spending.

Sections of the budget plan released to the public showed heavy spending on education, health and social welfare as well as state loans supporting job creation.

Many of the biggest infrastructure projects, such as a $22.5 billion plan to build a metro rail system in Riyadh by 2019, are funded off-budget from a separate account and insulated from oil prices. That account contained SR514 billion in October.

Saudi Arabia’s inflation-adjusted GDP grew an estimated 3.6 per cent this year, up from 2.7 per cent in 2013, the Finance Ministry said.

Growth may slow a little next year but Saudi Arabia will not come close to recession regardless of the oil price, Sfakianakis said, adding that very strong private sector activity would help to offset any slowdown in the oil sector.