Lower oil prices will clearly weigh on Saudi Arabian economic activity to some extent, but the government remains committed to supporting the local economy, even at the expense of large fiscal deficits. Indeed, this year is unlikely to be particularly different to 2014, with the 13th Islamic month automatically pushing public spending higher than normal and Custodian of the two Holy Mosques King Salman promising two months bonus of public sector salaries; however, the more constrained environment will become apparent in 2016-18. Higher interest rates are also expected to feed through in the later years, but the impact of this is likely to be cushioned by a stronger riyal, which will be an important offset for an import-dependent economy such as Saudi Arabia, according to a report by Samba Financial Group.

Oil revenue

Starting with revenue, Samba expects the government’s take from oil falling by almost 38 percent in 2015 as Brent flops to an average of $60 a barrel from $100 a barrel last year. Total revenue is therefore expected to be about SR776 billion in 2015, slightly higher than the SR742 billion recorded in 2010, for example. A moderate recovery in oil earnings is in prospect for 2016-18 as the flow of US tight oil is partially stanched, allowing prices to increase to an average of $85 a barrel by 2018. This would see overall revenue rise to SR1.1 trillion by 2018. Nonoil revenue, a large part of which is earnings from customs, is expected to show only incremental growth.

Spending growth

What of spending? In the absence of intra-year fiscal data or comprehensive end-year accounts, forecasting government spending is hazardous, and even more so given the collapse in oil prices. Samba said spending growth will be maintained. In 2009 prices fall by a similar amount: From $100 a barrel in 2008 to $62 a barrel. However, the government kept spending high, even increasing the rate from 12 percent to 14 percent. The government dipped into reserves to finance a fiscal deficit that reached over 5 percent of GDP.

If our oil price forecast is correct — or at least showing the right direction — prices should begin to recover over the next twelve months, albeit gradually. This will give the government the confidence to increase spending.

The report said there are large capital spending commitments already in place for this year, and these are unlikely to be threatened. Some SR515 billion (or 20 percent of forecast GDP) is available at the central bank specifically for allocated capital projects. In 2016-18 capital spending growth is likely to slow quite markedly as the authorities attempt to improve the fiscal position. Thus capital spending growth will slow to an annual average of just 1.3 percent during those years but capital outlays will still be substantial: At SR510 billion, spending in 2018 is anticipated to be some 78 percent higher than in 2011, for example.

Two months bonus

Current spending is set to remain reasonably firm, particularly this year following King Salman’s announcement of two months bonus salary payments for all public sector workers and the impact of the 13th Islamic month. Spending growth is likely to soften appreciably in 2016-17, as the government finally adjusts to the lower oil price environment but the Islamic calendar will come back into play in 2018. While the government is not about to cut spending on public sector wages and salaries, it is fair to assume that efforts to “Saudiize” the private sector will be intensified.

Contracting sector

How will the nonoil economy be affected by this spending profile? A weaker pace of public investment growth will clearly feed through into the contracting sector, though that will be more obvious in 2016-18. Some private investment is also likely to be shelved given weaker oil prices. But many private investors are also likely to calculate that government spending on wages and salaries is unlikely to be touched, and that therefore private consumption should continue to grow at a decent pace, the Samba report said.

The opening of the stock market has the potential to raise asset prices and confidence. Thus, investment in retail, hotels, restaurants etc, is likely to grow at a decent pace.

In an import-dependent economy such as Saudi Arabia’s, the stronger dollar will reduce import costs and free up disposable income for both consumers and companies.