Saudi Arabia to boost defence spending

Saudi Arabia is on track to become the world’s fifth-largest military spender by 2020 as it boosts its defence budget by 27 per cent over the next five years despite lower oil prices.

With regional conflicts worsening the oil-rich kingdom‘s neighbours, the United Arab Emirates and Qatar, are also planning to increase spending on their militaries, said consultancy IHS Jane’s Aerospace, Defence & Security.

By contrast, smaller Gulf states are reacting to the lower oil-price by making deeper cuts to defence plans. The IHS forecasts assume oil prices will recover to $80 a barrel by 2017, rising to $100 a barrel by the end of the decade.

IHS says Saudi defence spending will be $48.7bn in 2015, a 2 per cent contraction over last year. It will rise slightly to $49.5bn next year before jumping to $52bn in 2017 and reaching $62bn by 2020. Riyadh’s defence budget had been rising by 19 per cent a year since the Arab uprisings of 2011 placed Gulf governments under domestic political pressure.

“We certainly expect a significant slowdown in the short term but longer term prospects remain strong,” said Craig Caffrey, IHS principal defence budget analyst.

The International Monetary Fund forecasts that Riyadh will face a 20 per cent fiscal deficit this year as strong spending outpaces government revenue. The Saudi government is tapping foreign reserves to finance the deficit, and they fell by $11.6bn to $683bn in April, down by about $60bn from last year’s peak. The IMF forecasts Saudi economic growth will decline from 3.5 per cent this year to 2.6 per cent in 2016 as spending is adjusted to lower revenues.

“Despite Saudi Arabia’s heavy exposure to oil price fluctuations, there have been very few signs of any severe reactionary adjustments to government spending trends,” said Mr Caffrey.

Riyadh has embarked on a new, more active foreign policy since King Salman assumed the throne at the beginning of the year. It has led a two-month long air campaign against rebels in Yemen and last year joined the US-led coalition against the Islamic State in Iraq and the Levant, known as Isis.

The kingdom is also challenging the perceived encroachment of rival Iran in sectarian conflicts across the Middle East, including Iraq, Syria and Yemen and, along with other Gulf states, is seeking more advanced weaponry from the US to counter what it fears could be an emboldened Iran if a nuclear deal with western powers ends sanctions.

The UAE, a strong Saudi partner in regional conflicts, has a more diversified economy — with hydrocarbons accounting for 55 per cent of gross domestic product — and can therefore better withstand lower oil prices.

Rapid defence spending growth in the UAE between 2007 and 2011 has stabilised in recent years, and is now pegged at $15.7bn. IHS forecasts it will accelerate beyond the $17bn mark after 2017.

Qatar, which last year faced diplomatic isolation from its Gulf neighbours over its support for pan-regional Islamist groups, announced $23bn worth of potential defence procurement projects in 2014, marking an “unprecedented increase in investment in the military”, said Mr Caffrey. The gas-rich state is also expected to increase spending from $3.7bn this year to $4.5bn by 2020.

The other three members of the Gulf Co-operation Council — Kuwait, Oman and Bahrain — are reducing military spending after the oil price slide.

Oman, which is particularly vulnerable to lower oil prices, is set to slash spending by 9 per cent from this year’s peak of $9.9bn to $8.9bn in 2017.

Kuwait, where oil accounts for 91 per cent of government revenue, is trimming overall expenditure by 18 per cent through reductions in defence spending this year and next, said IHS.

Bahrain, whose economy is affected by large scale domestic unrest in 2011, has already cut its defence budget to $1.5bn, an 11 per cent fall on 2014. With an oil price of $120 a barrel needed to balance the budget, the tiny Gulf monarchy is forecast to reduce spending on its core defence budget by as much as a quarter in real terms, according to IHS.

FT