Saudi Arabia to cut public spending
Saudi Arabia’s finance minister Ibrahim Alassaf yesterday confirmed for the first time that the kingdom will cut public spending, as the country attempts to weather the low oil price that has blown a US$120 billion hole in its finances.
“We have built reserves, cut public debt to near-zero levels and we are now working on cutting unnecessary expenses while focusing on main development projects and on building human resources in the kingdom,” Mr Alassaf said n an interview with CNBC Arabia.
“There are some projects like the ones that have been approved a few years ago and haven’t been carried out until now – that means such projects are not currently necessary and can be delayed,” he said.
Not all projects would be cut at the same pace, Mr Alassaf said.
“Projects in sectors such as education, health and infrastructure are not only important for the private sector but also for the long-term growth of the Saudi economy.”
This marks the first time since last year’s oil price collapse that a high-ranking government minister has publicly said that the government will reduce infrastructure spending.
The oil price fell to $42 per barrel last month, down from about $110 per barrel in mid- 2014.
The kingdom needs an oil price of about $100 to cover its spending.
Saudi Arabia has been burning through its currency reserves to plug the gap between spending and revenues since the oil price collapsed late last year.
But the IMF estimates that the kingdom has about five years of reserves left at current rates of spending. That is why the government has moved to cut spending, and has said that it will issue new local riyal-denominated debt.
A Saudi central bank official was last week forced to quash speculation that the kingdom would consider adjusting its dollar pegged-exchange rate, after one-year forwards on the Saudi riyal against the dollar rose. That indicates that investors anticipated the riyal would be worth less in dollar terms in a year, which would only be possible following a devaluation.
Signs of a slowdown in China are likely to further exacerbate Saudi Arabia’s spending worries. China, the world’s second-biggest economy, has supported commodities prices since 2008 by embarking on an investment-fuelled growth strategy.
But signs of oversupply in Chinese intermediate goods production, and slowdowns in real estate and manufacturing have led market participants to worry whether Chinese growth prospects are weaker than they appear – and whether that will lead to reduced demand and lower prices for commodities including oil.
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Updated: September 6, 2015 04:00 AM