Could "cautionary" Saudi spending behavior lead to an economic downturn in the Middle East?
Saudi Arabia's government spending is likely to witness a sharp slow down in 2014 thus signaling the kingdom's efforts to curb expenditures after years of huge increases, said a report.
The overall expenditures are budgeted to rise by a modest four per cent this year in budget-on-budget terms, compared to the 19 per cent leap envisaged in the 2012 and 2013 budgets, according to the National Bank of Kuwait (NBK).
The targeted rise in spending is also the lowest rate seen in the past decade, signaling efforts to curb expenditures after years of huge increases, it stated.
Although the Saudi economy seems to have some momentum, a more cautious approach to government spending could contribute to slower economic growth over the medium-term than in the past, said the top Kuwaiti lender in its report.
"After growing at an average rate of 8 per cent over the past decade – fuelled by average government spending increases of 14 per cent per year – we expect real non-oil GDP growth to reach around 4-5 per cent this year. Going forward, this implies a greater role for the private sector in supporting growth," the report added.
According to NBK, the slowdown in budgeted spending growth comes from both the current and capital spending segments.
Current spending – which accounts for around 70 per cent of all spending – is projected to rise by 14 per cent to SR607 billion. Although still very strong, this is a much slower pace than in recent years.
Following pay raises and bonuses in the public-sector, planned current expenditures grew by a remarkable 29 per cent per year on average between 2011 and 2013, said the report.
Budgeted capital spending, on the other hand, is due to fall outright, by 13 per cent to SR248 billion, its lowest budgeted level since 2009.
"This may partly reflect the completion of an earlier round of investment spending. But it is also worth noting that many large infrastructure projects by state-owned firms, like Saudi Aramco for example, are financed off-budget and thus do not show up as direct government spending," the bank said in its report.
Despite the softness of the headline figures, however, the deceleration in overall spending growth in 2014 is unlikely to be as sharp as suggested by the budget. This is because actual spending growth has already moderated over the past two years, partly as a result of one-off spending measures in 2011.
Actual government spending grew by a moderate six per cent in 2012 and 2013, down from a massive 26 per cent in 2011.
"We expect growth in actual spending to come in at a more modest 5 per cent this year – more or less in line with the government’s projections. The slowdown from 2013 is therefore marginal," the NBK pointed out.
Moreover, there is another reason to interpret the headline budget figures with caution. Saudi Arabia has overshot its budget plans by around 25 per cent on average over the past decade, partly due to supplementary spending on subsidies and wages and additional expenditures for ambitious infrastructure plans, the report stated.
"But in 2013, the government overspent by a much lower 13 per cent. We interpret this as further evidence of a tighter approach to spending practices than before, with an eye on curbing excesses and improving fiscal sustainability," said NBK in the review.
"We project revenues to decline again this year on the back of lower oil prices and reductions in oil output. As global oil demand weakens and non-Opec supplies continue to rise, Saudi is expected to make significant production cuts this year in order to balance the market," said the top lender.
"Oil revenues should therefore fall. Non-oil revenues are likely to grow, but still only constitute around 10 per cent of the total," the report stated.
According to NBK, the government has projected a balanced budget for this year, after an estimated surplus of 7 per cent of GDP in 2013.
"Given the expected decline in revenues, we also project the budget surplus to narrow this year – despite moderating expenditure growth. Based on our revenue and spending forecasts, we expect Saudi’s fiscal surplus to shrink to around 5 per cent of GDP in 2014," he added.