Saudis to cut wages to cope with oil slump

Saudi authorities pledged to curb wages and push ahead with investments next year as the world’s largest oil exporter seeks to counter the effect of tumbling crude prices on the economy.

The government said it expects the budget deficit in 2015 to widen to 145 billion riyals ($39 billion), from 54 billion riyals this year, the Finance Ministry said today. That amounts to about 5 percent of gross domestic product, according to Arqaam Capital, a Dubai-based investment bank.

The Finance Ministry said the government will continue to invest in areas such as education and health care, while exerting “more efforts” to curb spending on wages and allowances, which make up about 50 percent of spending. The kingdom will resort to borrowing and use of reserves to plug the budget deficit, the state-run Saudi Press Agency said, citing Economy Minister Mohammad Al-Jasser.

Projected revenue will drop more than 30 percent next year to 715 billion riyals, while expenditure was set at 860 billion riyals, budget data show. Spending in 2014 is estimated to have been 1.1 trillion riyals, 29 percent higher than target.

During his nine-year reign, King Abdullah, 90, has allocated a record amount of money to raise wages, build roads, industrial centers and airports as he sought to bolster growth and keep political unrest at bay. Government spending has been driven by crude prices averaging above $107 a barrel since the end of 2011. Oil is now trading at nearly half that level, having slumped to its lowest since 2009.

The spending spree hasn’t resolved problems such as high youth unemployment, especially in Saudi Arabia, where the rate was almost 30 percent in 2012, according to the International Monetary Fund. Despite total employment growth averaging near 8.5 percent, employment growth for Saudis was 4.6 percent in the years between 2010 and 2012, the IMF said in July last year.

Brent crude slipped 2.4 percent yesterday to $60.24 a barrel, bringing its drop in the past six months to 47 percent.

“The budget will continue to focus on priority investment programs that enhance sustainable and strong economic development and employment opportunities for Saudis,” the Finance Ministry said.

The kingdom’s benchmark Tadawul All Share Index of stocks rose 0.6 percent at the close in Riyadh, trimming its decline over the last six months to about 8 percent.

“We see the aim of the budget to progress with key strategic projects, whilst reining in excessive government spending,” Monica Malik, chief economist of Abu Dhabi Commercial Bank PJSC, said today. “We did not expect to see a sharp retrenchment in government spending.”

Although Saudi Arabia and other Gulf oil producers “are robust and have significant buffers to survive price differences, they could also face difficulties,” Lucio Vinhas de Souza, the New York-based managing director and sovereign chief economist at Moody’s Investors Service, said in a phone interview before the release.

“They’re going to have a reduction of their fiscal revenue, which is significantly dependent on the energy sector, and they’re going to be affected via export revenues,” he said.

The economy is estimated to have grown 3.6 percent in 2014, missing the 4.3 percent median estimate of 13 economists surveyed by Bloomberg. Gross domestic product expanded 2.7 percent in 2013, the Finance Ministry said.

The surge in oil prices over the past decade helped Saudi Arabia boost its net foreign assets to a record 2.9 trillion riyals in October, according to central bank data.-Bloomberg