Saudi Arabia is doubling down on domestic spending despite falling oil revenues.
Amid a volatile start to 2019 for crude markets, Riyadh is persisting with a risky economic strategy aimed at appeasing an anxious population.
Success depends on reversing the slump in oil prices.
Riyadh’s budget for 2019 gives the impression of a country in denial.
Spending will increase 7pc to a record 1.1 trillion riyals ($438.5 billion), while total government revenues are targeted to rise 9 percent to 975b riyals in the forthcoming fiscal year, according to the Ministry of Finance.
In order to have any hope of balancing its books, analysts say the kingdom would need oil prices to trade above US$84 a barrel for the entire year at the very least.
However, the odds of this happening remain long.
Few analysts expect prices to hold at these levels, despite Opec’s deal with Russia and its allies to cut 1.2m barrels per day of production starting this month.
Brent crude was trading this week at around US$56 per barrel, almost 40pc lower than it did in October. If autumn is coming for the global economy then oil markets may still be in for a deep winter freeze to follow.
Paul Gruenwald, the global chief economist at S&P Global Ratings, is forecasting global GDP growth will slow this year led by the US, where expansion may drop to around 2 percent by the end of 2019.
China – the world’s largest importer of crude – will also see its staggering rates of economic growth moderate further.
The rating agency has also lowered its forecast for Brent crude prices by $10 per barrel to $55 per barrel in 2019.
Given these warning signs, Saudi Arabia is taking a risk issuing such an expansionary budget when the short-term outlook for oil – which accounts for more than 70 percent of its export revenues – looks so bleak.
Instead of cutting back, Riyadh is doubling down on giveaways.
For example, generous cost-of-living allowances have been extended to government workers to curry favor.
However, the kingdom’s rulers have little choice other than to continue with their ruinous spending.
The last couple of years have been politically tumultuous for the world’s largest exporter of crude.
Firstly, Crown Prince Mohammed bin Salman had dozens of his royal cousins and princes arrested in November 2017 in the biggest purge of the establishment since his father King Salman came to power.
Officials – including family members at the top of the Al Saud dynasty – were still being held by the middle of last year as the state tried to claw back billions of dollars.
A sweeping cabinet reshuffle at the end of the year reinforced the Crown Prince’s position but his reputation has been tarnished by events.
His campaign to isolate Qatar has backfired. Instead of capitulating to its larger neighbor, the tiny sheikhdom has fought back.
Doha recently embarrassed the kingdom by resigning its membership of Opec in December.
Riyadh’s war in Yemen has also stalled, with both sides forced into an uneasy truce.
The killing of dissident commentator Jamal Khashoggi inside the Saudi consulate in Istanbul also provoked international criticism of the kingdom and its rulers.
Although officials deny the government ordered his death, the episode possibly handed US president Donald Trump more leverage to pressure Riyadh on oil policies in return for his unflinching support.
Embarrassingly for Saudi, Trump now claims his intervention has forced prices lower and not Riyadh’s considered policies.
Meanwhile, economic reforms aimed at weaning the kingdom off its dependence on oil exports have made slow progress.
Its flagship listing of a 5 percent stake in state-owned oil producer Saudi Aramco to raise $100bn and help diversify the economy has been delayed, or permanently shelved.
With other sources of significant foreign currency income outside of oil and petrochemicals limited, the kingdom has few alternatives other than to increase borrowing or drain its foreign reserves.
Debt is expected to reach around 22 percent of GDP in 2019, the Ministry of Finance has previously said. It has imposed a 30pc cap on public borrowing as a percentage of the economy to keep a grip on public finances.
However, net debt stood at 549.5bn riyals as of Sept 30, one of the worst-performing Gulf countries.
Although its overseas wealth has been partially replenished, total net foreign assets held by the Saudi Arabian Monetary Authority had dipped below the $500bn threshold last year as the government dipped into its nest egg to compensate for weaker prices.
Of course, the kingdom’s economic planners would prefer to keep its rainy-day funds intact for the time when its oil is no longer in such demand.
Instead, economic pressures mean Riyadh will have to keep its pact with Opec and Russia intact to boost the price of crude back to sustainable levels.
The oil-producing alliance is next expected to meet in April, but with prices now in freefall, an earlier gathering cannot be ruled out.
Ahead of the last Opec meeting when the group and its allies agreed to implement 1.2m barrels per day of cuts, Ehsan Khoman of MUFG highlighted the Saudi position: “Saudi Arabia’s oil strategy decision is simple – either receive higher prices and sacrifice market share through lowering oil production, or alternatively receive significantly lower revenues (and thus agreeing with its geopolitical US ally) by maintaining or even further raising production levels.”
The rout in oil markets at the end of last year may have steadied but Saudi Arabia’s options remain limited. Instead of an expansionary budget, a return to austerity still looks a more prudent approach unless it can permanently reverse oil’s downward trajectory.
(Andy Critchlow is the head of energy news at S&P Global Platts)
— Daily Telegraph