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Saudi breakeven oil price crawls higher

Bank of America Merrill Lynch says its preliminary spending projections for 2014 place Saudi Arabia’s fiscal breakeven oil price at $85 a barrel.
“This is $5 higher than the floor we had previously anticipated policy-makers would be looking to defend,” the bank said in a report.
“We see two main takeaways from Saudi Arabia’s 2014 budget. Firstly, the fiscal breakeven oil price has crawled higher and remains sticky at $85 per barrel due to Arab Spring spending. Secondly, a shift to more realistic budgeting practices suggests awareness of the need to manage expenditures carefully. We accordingly maintain our 2014 GDP growth projection at 3.6 percent,” said the bank.
“The Saudi government 2014 budget is the highest on record and should support economic activity but at a somewhat more moderate pace, in our view,” Bank of America Merrill Lynch said.
It said 2014 expenditures are conservatively projected at SR855 billion, in line with MoF projected revenues and the Ministry of Finance 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 percent to 15 percent in 2014, broadly in line with 2013,” the report said.
“We expect 2014 spending to reach SR960 billion. Given constraints on oil production, which we see flattish versus 2013 average levels, and our 2014 forecast for Brent oil price ($105 per barrel). We thus see room for the fiscal surplus to decline to 6 percent of GDP,” said Bank of America Merrill Lynch.
The 2014 budget retains much of the focus of recent budgets in terms of breakdown of spending, though it does pencil in lower capital expenditures.
The largest appropriations of government spending, apart from the defense sector (undisclosed amount), will be the education sector (SR210 billion budgeted), health and social affairs (SR108 billion budgeted) and infrastructure and transportation (SR66.6 billion budgeted).
The Ministry of Finance also expects the Specialized Credit Institutions to disburse SR85.3 billion in loans in 2014.
This is the second largest appropriation after the 2012 one and should continue stimulating the nonoil economy.
Capital spending is budgeted at SR248 billion, 13 percent 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 percent higher than 2010 levels,” said the report.
“Both 2013 government revenues and expenditures came in line with our projections. Total revenues stood at SR1131 billion vs our projections of SR1194 billion, and total expenditures stood at SR925 billion versus our projections of SR900 billion,” said the report.
It said 2013 overspending over MoF budgetary projections reached 12.8 percent, in line with our view that overspending would not reach the 20%+ levels seen in previous years thanks to more realistic budgetary practices.
As a result, the budget surplus was moderately narrower than estimated and stood at 7.4 percent of GDP. GDP growth also came broadly in line with our projections (3.8 percent realized versus 3.6 percent projected) on the back of (gradually easing) contraction in the hydrocarbon sector and robust growth in the non-hydrocarbon sector.
The above also imply strong economic activity in 4Q13 but note that the estimates remain preliminary and are typically revised mid-year.
Bank of America Merrill Lynch added: “Government revenues in 2013 are just 3 percent higher than their 2008 levels, while government spending is 78 percent higher. Current government efforts to increase Saudization levels in the private sector and recent labor market initiatives could help contain the growth of public sector employment, given the wage bill represents 50 percent of current spending and 35 percent of total spending. Nevertheless, the arithmetic of the growth model remains unfavorable in the lack of reforms, given future oil production increases could be limited, in our view.”