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Saudi breakeven oil price 'crawls up'

Riyadh, January 6, 2014

The Saudi government's budget for 2014 is the highest on record and retains much of the focus of recent budgets in terms of breakdown of spending, though it does pencil in lower capital expenditures, according to a report by Bank of America Merrill Lynch.

The largest appropriations of government spending, apart from the defence sector (undisclosed amount), will be the education sector (SR210 billion), health and social affairs (SR108 billion) and infrastructure and transportation (SR66.6 billion).

The Bank of America Merrill Lynch repport highlights two main aspects of the budget. Firstly, the fiscal breakeven oil price has crawled higher and remains sticky at $85/bbl due to Arab Spring-related spending. Secondly, a shift to more realistic and prudent budgeting practices suggests awareness of the need to manage expenditures carefully.

"Though the budget remains expansionary, we expect a continued slowdown in the pace of overspending and a lower fiscal impulse versus previous years," said the report.

The 2014 expenditures were conservatively projected at SR855 billion, in line with finance ministry's projected revenues and the MoF therefore has budgeted for a flat fiscal balance.

"The shift to more realistic and prudent budgeting practices means we expect overspending to be around 10-15 per cent in 2014, broadly in line with 2013. We expect 2014 spending to reach SR960 billion," said the report.

"Given constraints on oil production, which we see flattish versus 2013 average levels, and our 2014 forecast for brent oil price ($105/bbl), we thus see room for the fiscal surplus to decline to six per cent of GDP," it said.

The ministry expects the specialized credit institutions to disburse loans worth SR85.3 billion in 2014. This is the second largest appropriation after the 2012 one and should continue stimulating the non-oil economy, the report said.

According to to BofA Merrill Lynch, the Saudi capital spending is budgeted at SR248 billion, 13 per cent lower than the record 2013 appropriation.

"Since 2011, the central government execution of its capex budget appears to have improved. We think the lower budgeted amount reflects a degree of policy prudence but also the large capital spending that already took place.

"As such, some normalization should not be a cause of overdue worry, in our view, and the budgeted amount, if fully realized, is still 25 per cent higher than 2010 levels," it said.

BofA Merrill Lynch said both 2013 government revenues and expenditures came in line with its projections. "Total revenues stood at SR1,131 billion vs our projections of SR1,194 billion, and total expenditures stood at SR925 billion versus our projections of SR900 billion," said the report.

The report said the budget surplus was moderately narrower than estimated and stood at 7.4 per cent of GDP. The GDP growth also came broadly in line with its projections (3.8 per cent realised versus 3.6 per cent projected) on the back of (gradually easing) contraction in the hydrocarbon sector and robust growth in the non-hydrocarbon sector.

BofA Merrill Lynch said its preliminary spending projections for 2014 place the fiscal breakeven oil price at $85/bbl, which is $5 higher than the “floor” we had previously anticipated policy-makers would be looking to defend.

"Government spending remains affordable but the fiscal flexibility space has decreased, in our view. The fiscal breakeven oil price stood at just $41/bbl in 2008 and in a range of $70-80/bbl for 2009-2012," stated the report.

"The sending we have penciled in for 2014 depends in part on oil price developments. In the past, with higher oil prices than budgeted, supplemental budgets were adopted, leading to a pattern of overspending which could test the prudence of policy-makers," it added.

According to BofA Merrill Lynch, the level of oil production this year also provides a source of uncertainty, some of which is linked to regional geopolitical developments (Iranian nuclear standoff).
TradeArabia News Service

Tags: Saudi | breakeven oil price |

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