All Sorts of Things

Random posts on all sorts of things designed to inform and provoke.

Saudi Arabia: High Oil Prices Keeps Easy Money Flowing but Economic Absorption Questionable

Saudi Arabia’s official 2013 budget rose by 19 percent as Riyadh continues to disburse large amounts of funds to restrain unemployment and placate a restive populace. Over 20 percent of the government’s current year expenditures are directed towards education including construction of over 530 new schools, new vocational training facilities and overseas scholarships for over 120 thousand students. Other items receiving substantial funding increases include healthcare, social programs and infrastructure development.

One would think that such an increase would have some impact on the government’s fiscal strength. However, that would be a mistake: Saudi Arabia generates a majority of its revenues from its oil exports and its 2013 budget forecasts a surplus of just $2.4 billion. However, this figure is based on a per barrel price between $68 and $70 and, since crude oil prices are likely to remain above $100 per barrel in 2013, the actual surplus will likely be much higher – similar to what occurred in 2012 when Riyadh’s actual surplus of $330 billion far exceeded its forecast of $187 billion.

In addition, Saudi Arabia has $650 billion in foreign exchange reserves that could be used in the event of lower than expected oil prices. It’s obvious, therefore, that Riyadh has more than enough resources to fund even more social spending measures that may be implemented if the popular King Abdallah passes away.

The Saudi economy has successfully absorbed Riyadh’s largesse. It grew 6.8 percent, in real terms, in 2012 while inflation, according to official figures, rose by a relatively meager 2.9 percent.

The question, however, remains as to how much free money and subsidy prices one economy can absorb before it begins to tilt. Riyadh’s plans to increase employment among Saudi citizens through the “Saudization” initiative and offset requirements in all contract negotiations reflects the government’s acknowledgment that the country’s economy cannot remain dependent on public funds alone.

Indeed, in 2012, private sector economic growth outstripped that of the public sector, and this is one signal that the government’s actions are having some impact on the broader economy although its unclear if this is the beginning of a trend or an anomaly.

Furthermore, this data does not project higher employment among Saudi nationals and the whole thrust of the “Saudization” initiative is to slow, stop and reverse the 40 plus percent unemployment rate among the country’s youth.

Over the next few years, Saudi Arabia will provide an interesting and valuable case study of nation whose future doesn’t depend on macroeconomic stability but microeconomic opportunities. Riyadh’s task is to maintain the former while fostering the latter, and its recent actions show its recognition of these challenges. The question, however, remains as to whether its citizens will step-up and refuse free money for hard work – something the most pious amongst us may find difficult to do.

4 comments on “Saudi Arabia: High Oil Prices Keeps Easy Money Flowing but Economic Absorption Questionable

  1. robglennie000
    July 3, 2013

    This is an interesting post.

    Saudi Arabia is a very rich country because of its energy resources and the demand for them from the west. However it is a country that has not really reconciled with the social needs of the people, though the steps being undertaken by the current King Abdullah are obviously quite welcome.

    A major part of the problem is the socially conservative attitude to women. The wealthy upper class of Saudi Arabia who can afford nice properties, good education and medical care, who can travel the world and work in good paying jobs are the same people somewhat reliant on the West propping up the energy sector. Few Saudi women can do any of what the previous sentence mentions. They are a major untapped resource and as rich as we might think Saudi Arabia is now, it ain’t nothing compared to how influential it would be if women were granted more rights.

    • AHB
      July 3, 2013

      Thank you for your comment. I agree that Saudi women are a vast untapped resource and giving them more rights can only help that nation grow economically. Unfortunately, the chances of that happening are as slim as a Saudi man’s desire to cut down on his sugar intake i.e. negligible.

  2. miringu0001
    January 7, 2014

    very informative

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This entry was posted on February 11, 2013 by in Global Economy and tagged , , .
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