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By Matthew Martin, Banking and Finance Editor for MEED
A huge police presence was rolled out across Saudi Arabia's major cities on 11 March to deter protests from starting what opposition groups hoped would be an Egypt-inspired 'Day of Rage'.
As it turned out, the protests failed to materialise. That came as little surprise after the government said any sign of demonstrations would not be tolerated and denounced public protests as 'unIslamic'. The people, it turned out, were equally afraid of what could transpire if protests occurred and nervous about the identity of the anonymous organisers of the protests.
Saudi Arabia state spending increases
The extent of the security presence on the streets of Saudi Arabia showed that the government has been deeply rattled by the uprisings that have spread across the Arab world. That fear has had a profound impact on economic policy. Although broader political reform has been at the heart of the wider protest movement, in Riyadh, that has been neglected in favour of opening the government coffers further.
Earlier this year, King Abdullah announced spending plans of SR485bn ($129bn). The cash will go on a wave of measures, including introducing unemployment benefit, paying bonuses to state employees, increasing wages, the construction of new homes and increasing the availability of home loans.
Despite the massive spending increases, Riyadh's budget looks healthy, buoyed by high oil prices. The Washington-based IMF is predicting the country will grow by 7.5% in 2011 and although that estimate is much higher than those of other analysts, all are bullish on the prospects for the Saudi economy in 2011.
The spending increase will push the kingdom's breakeven oil price much higher. The UK's Barclays Capital estimates that Saudi Arabia now needs an average oil price of $91 a barrel to balance the budget. Nonetheless, with oil expected to average more than $100 a barrel, that should still leave a comfortable surplus.
Reliance on high oil prices grows
However, it does show that Riyadh is becoming increasingly reliant on high oil prices to finance its domestic spending. The Institute of International Finance, a global bankers industry body, estimates that by 2015, oil will need to be about $110 a barrel for Saudi Arabia to balance its budget. The relentless increase in state spending has had a huge impact on oil price assumptions. In May 2009, King Abdullah said that a fair price for oil was around $75-$80 a barrel. If oil fell back to that level for a sustained period, Riyadh would probably have to start reconsidering its profligate spending.
"The government's dependence on oil revenue, and hence vulnerability to oil price movements, has grown rather than diminished," says Keith Savard, director of economic research at local bank Samba.
The government is working on an ambitious plan to make domestic energy more efficient, providing more power through renewable energy sources in order to keep more oil available for exports. The King Abdullah Centre for Alternative and Renewable Energy was created in April 2011 to drive this forward.
While conserving oil for export is clearly the long-term goal of the government, short-term, the focus will be on measures to bolster stability through job creation and building affordable homes for the lower and middle-income classes.
The danger of increased state spending is that the government risks elbowing out the private sector from the economy, and that, ultimately, is where the majority of the new jobs need to come from.
Staff
