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.