Energy Future

Saudi Arabia sticks to budget despite oil’s slide

Oil-rich Saudi Arabia is expected to defy the recent slide in the price of oil and keep to its spending commitments when it reveals its budget for 2015 this week.

Analysts have told CNBC in the run-up to the highly-anticipated announcement that authorities are expected to at least keep the course, despite the possibility of stumbling into budget deficit territory in 2015.

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The Aramco oil refinery in Dahran, Saudi Arabia.
MyLoupe | UIG | Getty Images

"Most expectations are favouring a modest increase in public expenditures, which is positive news for investors in local securities and alternative investments as well," Abdullah Alawi, Head of Research at Aljazira Capital told CNBC.

"We believe Saudi Arabia and other GCC economies will run through their existing mega infrastructure and welfare plans to enhance their efficiency, while resetting priorities and project deadlines to accommodate the new oil market realities".

Saudi Arabia has massively ramped up its spending since the Arab Spring popular uprising in 2011. Annual expenditures since 2010 have risen by at least 50 percent, and have mostly focused on infrastructure and social projects.

The country's government should be able to mitigate the short-term economic risks that are bound to arise from lower crude prices, thanks to having one of the world's largest foreign currency reserves, estimated at $750 billion in 2014. Still, it is the dent in sentiment that will be difficult to fix.

"The decline in oil prices to the level where it pushes the fiscal budget into a deficit has the potential to create a negative psychological impact on the performance of the private sector," Riyadh-based Jadwa Investment maintained in a report said earlier this month.

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OPEC head hopes for price revival by 2nd half
OPEC head hopes for price revival by 2nd half

The budget decision comes as oil minister Ali Al Naimi reiterated the kingdom would not take remedial action by slashing output, even if non-OPEC countries decided to do so. The long-serving minister also told Al-Hayat newspaper in a separate interview on Sunday he was confident oil prices would rebound, although the world may "not see a return" to $100 a barrel.

G20 member Saudi Arabia is home to the biggest economy in the region. Government spending plays a major role in stimulating demand, with its impact being felt in neighbouring markets from Egypt to the United Arab Emirates.

The International Monetary Fund (IMF) forecasts the economy to expand 4.6 percent this year and 4.5 percent in 2015. Official data for the second quarter, the most recent available in the series, showed GDP growth had eased to an annual 3.8 percent.

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