Arab News – Saudi Arabia’s massive construction industry is capable of withstanding financial drawbacks and the current drop in oil prices, economists said Wednesday.
Their comments came in response to a Bloomberg report which quoted unnamed sources as saying that the government is reviewing projects valued at about SR260 billion and may cancel a third of them.
“The economy will still benefit from an SR1.6 trillion capital expenditure boom that lasted from 2008-2014, representing an annual 30 percent share of fiscal outlays,” commented Tamer El Zayat, senior economist at the National Commercial Bank.
John Sfakianakis, director of economic research at the Gulf Research Center, acknowledged that the government has to rationalize spending because of the drop in oil revenues.
He added: “The Saudi economy is in the midst of change and it is unavoidable for an overhaul to take place on what is vital and necessary and what can be postponed.”
He said that the economy is growing albeit at a slower pace than last year given that oil prices have plummeted by more than 50 percent since the second half of 2014.
“But things have to be put in a wider context. Saudi Arabia’s economy is far better than some other oil-producing nations within OPEC and outside,” he told Arab News.
Fiscal adjustment is an important exercise for the macro economic wellbeing of the nation. The government is taking necessary short-term steps in order to address structural challenges that if not managed properly would create adverse effects in the future, said the economist.
James Reeve, deputy chief economist and assistant general manager at Samba Financial Group, said: “There is no doubt that lower government spending will mean weaker economic growth this year. But there is short-term pain for long-term gain.”
He added: “The authorities need to make these adjustments in order to put the fiscal position on a sustainable long-term footing. These moves are necessary and will in retrospect be seen as very positive.”
The Bloomberg earlier claimed that Saudi Arabia was weighing plans to cancel more than $20 billion of projects and slash ministry budgets by a quarter to repair finances squeezed by low oil prices
But Ihsan Bu-Hulaiga, head of the Joatha Consulting, commented that there was no surprise in government reviewing projects because it was announced during last year’s budget.
The basic idea was to review projects which are not performing as the government reviews projects throughout the year, he told Arab News.
Commenting further, El Zayat said: “The government had the intent since last year of prioritizing capital spending and getting rid of unproductive investments, as such it is hardly a surprise on my part.”
He added: “In my opinion, the drive to optimize spending at this juncture is commendable to preempt a lower for longer oil price scenario. The economy will still benefit from SR1.6 trillion capital expenditure boom that lasted from 2008-2014. Transition toward a new economic model will surely entail tough decisions and moderation in economic growth, yet the government is keen on pursuing sustainability, a long-term endeavor.”