Oil glut & remittance risks

Petrol may be short in Pakistan these days. But unless PML-N manages to mismanage for the rest of its tenure, soft oil prices will keep benefiting Pakistanis. Latest in the series of statements that strengthens the low oil outlook are the ones made by Saudi Prince Alwaleed, and Mohammed al-Sabban Saudi Arabias minister of petroleums former senior adviser.
Alwaleed recently told CNN that the days of $100 per barrel may be gone forever. "We are
ever going to see $100-a-barrel oil prices again," he said. Recall that the Saudi oil minister Ali al-Naimi had said last month that his country will not reduce output - not now, not ever - which is why the $100 barrel may well be a thing of the past.
Those who wonder how long Saudi Arabia will be able to sustain the low oil price can take a cue from the recent statement of Al-Sabban. Earlier this week he told the BCC that Saudi Arabia can cope with low oil prices for "at least eight years". However, reportedly, he did add that the country is now in the process of cutting government spending, without which, Al-Sabban said, Saudi Arabia could not cope with low oil prices for more than four years.
The key words there is "cutting government spending", a notion that was not put on the table before. However, that seems unlikely this fiscal year, considering that the kingdom has passed an expansionary budget only about two and half weeks ago. Saudi Arabia, whose fiscal year is the same as calendar year, has projected a fiscal deficit for 2015, the first since 2011.
According to a recent report by Jadwa Investment, a privately-owned investment firm - education and healthcare remain the focus of Saudi Arabia government spending, accounting for nearly 44 percent of total spending. The Saudis are unlikely to cut spending in those two sectors due to social pressures. Besides, Pakistanis do not tend to find jobs in these two sectors, and therefore there are little risks of remittance loss as such.
Most Pakistanis in Saudi Arabia find jobs in the construction sector instead. According to the Jadwa, spending in transport and infrastructure, which received the third largest spending allocation of SR63 billion, is budgeted to decline by 5 percent year-on-year in 2015. But that should still not raise eyebrows as several other construction related projects are planned in the public sector, whereas SAs private sector construction is also seen on the rise.
For instance, the kingdom has planned the construction of three new universities aside from refurbishments and expansions of schools, universities and water projects. In private sector, according to Jadwa, construction, non-oil manufacturing, transport and communications, and wholesale and retail were the fastest growing sectors in 2014, with construction sector growing at a "robust" 6.7 percent year-on-year. The same sectors are seen driving growth in 2015.
Jadwa says that "negative sentiment associated with lower oil prices, the prospect of an interest rate hike, and a larger base effect, are all likely to contribute to the slowdown in the private sector". However, it adds that construction, transportation, retail and utilities will be the fastest growing sectors in 2015.
The gist of all this is that remittance inflows from Pakistani workers in Saudi Arabia are unlikely to take a hit in the calendar year 2015. However, there is a risk that Saudis (govt. & the private sector) will slash wages to cut spending - as they did during the Iraq war era. But pundits say that the chances of that happening are rather remote, touch wood!