beyondbrics

While most western governments are by now checking ministry sofas for any loose change that might have been lost in the creases, Saudi Arabia increased spending by 25 per cent this year – and has still been able notch up budget surplus north of $81bn, or 14 per cent of the kingdom’s annual economic output.

Emboldened, the kingdom now plans to raise government spending further next year, to an all-time budget high of SR690bn next year, according to the 2012 fiscal plan approved on Tuesday. A planned SR250bn splurge on housing projects comes on top, as the money needed has already been deposited at the central bank.

It is, as Jadwa Investment, a local investment house, says in a research note – with some understatement – an “expansionary budget”.

In the US and across Europe, countries are cutting spending to bring budget deficits under control and reduce their debt. This is not a concern for the Kingdom. While the planned surplus is small, debt is very low and should a deficit occur it can be financed comfortably by drawing on the vast stock of foreign assets rather than issuing new debt.

In addition to Saudi Arabia’s ambitious housing plans and government hand-outs to citizens – announced earlier this year to inoculate the country against turmoil elsewhere in the Arab world – much of the largesse will be showered on healthcare, education and defence.

The government spending splurge expanded Saudi Arabia’s economy by 28 per cent in nominal terms last year, the fastest rate of economic growth since 1980. Adjusted for inflation, the economy expanded 6.8 per cent, according to the fresh but preliminary government figures.

At $576bn, the Saudi economy is now the 21st largest in the world, according to Jadwa, between Sweden and Poland. Although lower oil production next year will dent growth, accelerating spending in 2012 could propel Saudi Arabia higher up the list, fully justifying its place in the G20 constellation.

However, all this government munificence does come with some risks. While some of the spending is on one-off investments and grants, Saudi Arabia’s “break-even oil price” – the level crude needs to sell at for the kingdom to balance its books – has crept up in recent years, to $80 a barrel according to the most recent IMF report.

Given the return of Libya’s oil to the market next year, rising Iraqi production, and downbeat forecasts for the global economy, the price of Saudi export crude is likely to fall to $92 a barrel, according to Jadwa. The joker will be the Middle East itself:

The turbulence in the Middle East and North Africa added a risk premium to prices in 2011 and this will remain in place in 2012 as uncertainty is likely to linger. Tensions surrounding Iran also have the potential to cause oil prices to jump, particularly given that global spare production capacity is low.

Further reading:
Arab spring drives up Middle East break-even oil price, FT
Gulf spends petrodollars on home front, FT