The kingdom spent $36 billion of the central bank’s net foreign assets — about 5 percent of the total — in February and March, the biggest two-month drop on record, data released this week show. The fall was in part due to King Salman’s order to give government employees and pensioners a two-month bonus after he ascended to the throne of the world’s biggest oil exporter in January.
The early months of Salman’s rule also saw a sharpening of the country’s rivalry with Iran — most strikingly over the Saudi-led air offensive in Yemen — and mounting security threats at home, challenges that had already led to a surge in military spending in 2014. The 48 percent drop in oil prices last year has prompted the government to use reserves and borrow from domestic banks to maintain spending on wages and investments.
The task of balancing Saudi Arabia’s economic and regional policies is increasingly falling to a new generation of princes, including the king’s son, Prince Mohammed Bin Salman. The prince, who was made second-in-line to the throne on Wednesday, heads a newly-created economic council and, as defense minister, is instrumental in the bombing campaign against Houthi rebels and their allies in Yemen.
Brent crude has recovered some of its losses, gaining 15 percent this year to about $66 a barrel at 1:31 p.m. in London. Income from oil exports accounts for about 90 percent of government revenue.
Malik expects the budget deficit to widen to 14.5 percent of gross domestic product this year, compared with a gap of 1.9 percent in 2014. The king’s handouts are likely to boost domestic consumption, supporting non-oil economic growth, she said.
Saudi Arabia accumulated tens of billions of dollars in reserves amid high oil prices. King Salman’s predecessor King Abdullah increased social and infrastructure spending after the 2011 revolts toppled rulers elsewhere in the region.
Military spending had increased well before the kingdom gathered a coalition of mainly Sunni-led countries behind its Yemen campaign. The “big $10-$15 billion” procurement deals have already been signed for the next three years, Michael Stephens, head of the Royal United Services Institute in Qatar, said by phone.
Saudi Arabia’s desire to play a larger role in the region means it’s likely to continue spending, Ibrahim Sharqieh Frehat, a professor of conflict resolution at Georgetown University in Qatar, said by phone.
The kingdom became the largest buyer of defense equipment last year, surpassing India, with inbound shipments jumping 54 percent, consultants IHS Inc. said in March.
“We are going to see this policy continuing and being reinforced,” which sits “neatly with the vision of the king of taking a regional leadership role,” said Frehat.-Bloomberg
