Saudi Arabia Year in Review 2014

Despite the turmoil in global energy markets, Saudi Arabia moved towards the end of 2014 with its economy having outperformed many in the region.

Since around 90% of government revenue is derived from hydrocarbons, the Saudi economy has been hit by the decline in oil prices, a response to cooling demand and a glut on international markets. Prices have fallen from $115 a barrel mid-year to under $60 at the end of the year, with Brent crude trading at a five-and-a-half-year low.

Though Saudi Arabia has ample fiscal reserves to support any price cutting campaign, such measures may come at a cost. In a statement at the end of December, the kingdom said its budget deficit will widen to SR145bn ($38.7bn) in 2015 from SR54bn in 2014. The finance ministry estimates economic growth of 3.6% in 2014, slightly lower than analyst expectations.

Despite the sharp decline in oil prices, spending for 2015 is projected at SR860bn ($229.3bn), an increase of 0.6% compared to 2014. Policy remains expansionary, supported by substantial reserves with analysts forecasting spending to remain in place over the next few years to keep growth of the non-oil sector at about 4%.

Oil price

The kingdom has maintained production levels despite lower oil prices, and extended its discounts on Arab Light sold to Asian countries, seeking to hold market share.

Such discounting may have a longer-term benefit in helping to shore up Saudi Arabia’s share of the global market. With the US having surpassed the kingdom as the world’s leading oil producer in 2014, any further eroding of Saudi’s hold on international sales is likely to be strongly contested.

Although the OPEC member’s production costs are among the lowest in the world, its strategy will continue to raise concerns with investors and analysts in 2015.

Standard & Poor’s downgraded its outlook for Saudi Arabia to stable from positive in early December due to lower oil prices and what it termed the Kingdom’s undiversified economy. In late October, the IMF warned that falling oil prices could reduce growth rates in Saudi Arabia and other GCC member states. For some time the fund has advocated that the Kingdom, along with other Gulf states, rein in expensive energy related subsidies.

However, much of the infrastructure development being carried out is aimed at diversifying the economy away from its dependence on oil and boosting employment opportunities for locals. Spending on transport systems, logistics, utilities, manufacturing and downstream industry has been stepped up in recent years as the government pushes a transition to a broader-based economy.

Market lows and potential highs

Concerns over falling oil prices and a slowing economy hit the Saudi stock market, with the Tadwul All Share Index easing in the latter months of the year. By the beginning of December, the main index had fallen back close to where it stood at the start of the year, erasing the gains made over the preceding 11 months.  

However, plans to open the exchange’s doors to foreign investors, as early as April according to Bloomberg, is seen as a bright spot for 2015.

The regulator, the Capital Market Authority, announced in July that the cabinet had approved proposals to allow direct foreign investment on the bourse. Under the draft regulations, foreign investors with a minimum of SR18.8bn ($5bn) of assets under management and at least five years experience in the business will be eligible to trade Saudi stocks.

As the largest equity market in the Middle East, with some 170 companies listed across a broad range of sectors and a capitalisation over $500bn, the opening up of the market is expected to attract strong interest from overseas. Although Gulf oil producers such as Saudi Arabia have significant buffers to survive oil price differences, analysts will be watching closely in 2015 to see how the country fares with lower fiscal and export revenues.