By Ed Attwood
Instead of cutting back amid oil price slide, don’t be surprised if Saudi Arabia sends a powerful signal, says Ed Attwood
At some point later on this week, the 2015 Saudi budget will be posted on the website of the Saudi Arabian Monetary Agency (SAMA), the kingdom’s central bank. This event is rarely a cause for wider excitement, but this year is different. Why? It’s the rest of the world’s first opportunity to see how the planet’s biggest oil exporter will react to the dramatic fall in the price of crude. Will the long procession of expansionary budgets come to an end? Is there panic in the palaces of Riyadh?
Sadly, for those who are expecting some drama, it’s unlikely that this week’s statement will reveal as much as they may be hoping. This is largely because there is always a hefty gap between how much the government says it will spend, and how much it actually spends. In addition, the budget has historically been put together based on a far lower price for oil than the markets have recently been paying.
As an example, let’s look at 2013. The budget announced in December 2012 said the government would spend SR821bn in total. By the end of the year, it announced it had in fact spent SR925bn. That may seem like a lot of overspend, but the original figures were based on a projected oil price of roughly $66 barrel. During the course of the year, the average price of Saudi oil was actually $104. That left the government free to overspend in some areas and still post a healthy SR206bn budget surplus.
In 2012, the gap was even bigger. The government announced a budget of SR829bn (again based on $66 for a barrel) and ended up spending SR1.131 trillion – that’s a third more than it had originally planned. Even that splurge still left a mammoth surplus of SR386bn, helped by an average oil price during the year of $112 for Brent.
At around this time last year, the government announced it would be spending SR855bn in 2014, and it will be interesting to find out later on this week exactly how much it has spent. Jadwa Investment thinks that budget was based on an annual average oil price of $67 (it’s just over $90 as we approach the last few days of the year), so we are likely to see more of the same – either a balanced budget or a surplus.
What all this really means, of course, is that there is no need for Saudi Arabia to pare back its spending drastically for next year, as it is already basing its budget on what many would presume to be a decent bet for the oil price in 2015. In effect, by doing nothing, it will still be able to balance the books. Many have pointed to the kingdom’s vast foreign exchange reserves of SR2.54 trillion, but if the price of crude stays around the $60-70 mark, these would not need to be touched.
So instead of cutting back, don’t be surprised if Saudi Arabia sends a powerful signal to the market by actually raising expenditure slightly. After all, it can easily afford to. The only difference in 2015 is that actual spending will probably tally much closer to budgetary spending – but sadly it will take us until this time next year to figure that one out for certain.