Saudi Arabia to stay the course on oil

It is business as usual for Saudi Arabian economy after new king takes helm, observers say.

King Salman promised to continue the policies of his predecessors. Saudi Press Agency / AP Photo
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Saudi Arabia’s newly installed King Salman has signalled that he will not rock the policy boat and investors agree.

The world’s largest exporter of crude oil is likely to continue its position of not cutting oil production to buoy falling prices while maintaining government spending to boost growth, say investors including the London-based emerging market boutique firm Ashmore Group and the frontier market specialist firm Exotix.

The country will also forge ahead with plans to open its stock market, the largest in the Middle East, to international investors as it seeks to become more integrated with global financial markets, they say.

“It’s business as usual,” said John Sfakianakis, the Riyadh-based director for the Middle East at Ashmore Group.

“They have to maintain current policies, policies that they have announced back in 2011 on social welfare schemes such as a housing project of 500,000 units, and I don’t think there will be additional ones. I don’t think the new king will alter economic policy in terms of social welfare.”

Even as oil prices have dropped 60 per cent from June, Saudi Arabia last month kept to its pledge to maintain spending this year. After the plunge in oil prices, officials said that its revenue was projected to fall to 715 billion riyals (Dh699.36bn) this year, from 1.04 trillion riyals last year. Riyadh projects this year’s expenditure to be about 860bn riyals.

Ali Al Naimi, the country's oil minister, took a gamble at Saudi-led Opec's last meeting in November, when the group refrained from cutting supply to bolster prices. And Mr Al Naimi indicated last month in a bid to protect its market share that Saudi Arabia was not interested in reducing production even if oil prices dropped to US$20 a barrel.

About 85 per cent of Saudi Arabian exports and 90 per cent of government revenue are directly derived from the hydrocarbons sector, according to the credit rating agency Standard & Poor’s.

Yet despite the fall in the price of oil since last June, from more than $100 a barrel to about $48 a barrel, Saudi Arabia’s economy is expected to weather the decline. The country’s GDP advanced 3.6 per cent last year and is expected grow 3 per cent this year, according to Mr Sfakianakis.

That is mainly because spending is not being reduced and steady oil prices over the past couple of years have boosted the size of the coffers of Arabian Gulf states, with the net current-account surplus of the region standing at about $2.4tn, according to economist estimates.

“The passing of King Abdullah is not a disruptive catalyst but succession, as with most Saudi risks (oil price, rising direct corporate taxation, gradual US shift away from the Middle East, Iranian proxy rivalry across the region, the emergence of ISIL, rising domestic oil consumption and social media) makes for a potentially more risky long-term outlook,” Exotix wrote in a note to clients. “But the short-term mitigating factor is the same in most cases – more spending on welfare, infrastructure, defence and overseas aid.”

The largest economy in the GCC may open its stock market to overseas investors from April, three sources said last month. The move could attract as much as $40bn of foreign cash into the $478bn exchange, the British asset management company Schroders said last July.

The main Saudi Arabian stock index, the Tawadul, has gained 1.1 per cent this year and declined 2.3 per cent last year. In between, during the rapid decline of oil, the measure fell more than 20 per cent in December before staging a partial recovery. Mr Sfakianakis still thinks there are interesting opportunities for investors after the oil drop.

“There is a viable middle class, purchasing power has increased over the past few years and there are domestic drivers,” said Mr Sfakianakis. “Population continues to grow by more than 2 per cent. People have to clothes themselves, feed themselves, educate themselves, provide health care. These things are the domestic drivers of growth and will be there regardless of where oil price goes.”

Participants at the annual meeting of the World Economic Forum in Davos thought the new Saudi king would bring continuity to policy, which they welcomed.

Majid Jafar, the chief executive of Sharjah-based Crescent Petroleum, said the new Saudi king would likely continue the current oil policy. “I expect there will be continuity in oil policy. The rapid clarity on the succession will give further confidence to foreign governments and investors in Saudi Arabia.”

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