Oil Prices And Their Impact On Healthcare Expenditure: Russia & Saudi Arabia

BMI View : Large oil and gas sectors have benefited the healthcare sectors of Russia and Saudi Arabia as the provision of healthcare has largely been funded through state revenues. Elevated oil prices over the last decade saw these countries accumulate considerable surpluses. Where Russia focused early on in delivering more improvements in healthcare, Saudi Arabia has only begun to accelerate its commitment to healthcare expenditure, owing to the Arab Spring. While oil and gas exposure has historically reaped considerable benefits for these two countries, in the future, declining oil prices will make it more difficult to sustain expansion in healthcare spending.

Russia and Saudi Arabia are united by their wealth in oil and gas reserves, but the two countries have experienced a different path in the development of their respective healthcare systems and to their overall national development. These two countries also provide a snapshot on the manner in which healthcare systems from emerging markets transition from modest beginnings to much more ambitious projects.

Russia: A Decade Of Advancement Faces Serious Headwinds

Healthcare Spending Boom Spurred By Oil Price Runup
Russian Healthcare Expenditure (LHS) and Brent Crude Price, USD (RHS)

Oil Prices And Their Impact On Healthcare Expenditure: Russia & Saudi Arabia

BMI View : Large oil and gas sectors have benefited the healthcare sectors of Russia and Saudi Arabia as the provision of healthcare has largely been funded through state revenues. Elevated oil prices over the last decade saw these countries accumulate considerable surpluses. Where Russia focused early on in delivering more improvements in healthcare, Saudi Arabia has only begun to accelerate its commitment to healthcare expenditure, owing to the Arab Spring. While oil and gas exposure has historically reaped considerable benefits for these two countries, in the future, declining oil prices will make it more difficult to sustain expansion in healthcare spending.

Russia and Saudi Arabia are united by their wealth in oil and gas reserves, but the two countries have experienced a different path in the development of their respective healthcare systems and to their overall national development. These two countries also provide a snapshot on the manner in which healthcare systems from emerging markets transition from modest beginnings to much more ambitious projects.

Russia: A Decade Of Advancement Faces Serious Headwinds

Russia's experience of the last two decades has been characterised by the lows of the 90s in the wake of the collapse of the Soviet Union and the rapid growth in the 2000s that coincided with the beginning of the so-called 'commodities super-cycle'. The country's trade surpluses ballooned between 2000 and 2011 to USD785bn as oil prices quadrupled. The state budget expenditure grew by 900% in real terms and Russian consumer incomes trebled in real terms. Healthcare quality indicators such as number of beds per thousand patients, physicians per thousand patients and pharmaceutical expenditure per capita rose considerably over the last decade.

Healthcare Spending Boom Spurred By Oil Price Runup
Russian Healthcare Expenditure (LHS) and Brent Crude Price, USD (RHS)

However, in the future, this reliance on oil and gas exports is set to become a considerable problem for the country. Russia's inability to export value-added goods and sole reliance on commodities is coming back to haunt the country, as the country is headed towards a current account and federal budget deficit over the next 5 years. The oil-fuelled budget surpluses that have stabilised the Russian economy and its balance of payments dynamics are now set to unwind as imports are set to outpace exports, and the price of oil is set to decline (albeit gradually) over the next decade. This means that federal budgets will for the first time enter into deficits and these deficits will gradually deepen.

Healthcare in Russia is funded through three means; the federal budget, social spending and the Health Insurance Fund. What the budget belies is that the biggest contributor to healthcare spending is social spending; the so-called system of "state guarantees" amounted to some RUB1.3trn ((US$40.3bn) in 2012, dwarfing the budget of the Ministry of Health. Revenues from the Health Insurance Fund were approximately RUB900bn (US$28.13bn) in 2012; from the onset of 2013, higher income Russians were expected to pay larger premiums into the Health Insurance Fund. This increase in premiums was expected to offset the decline in spending from the Ministry of Health, and overall healthcare spending for 2013-2015 was dependent on real GDP growth of 3.0% in 2013. Real GDP growth has fallen significantly short of this, with the Russian economy expected to post real growth of 2.0% in 2013 according to our proprietary forecasts as oil prices have declined in 2013. As a result, revenues from premiums have fallen short of government expectations.

Government Healthcare Spending To Slow Down Over Long Term
Russian Healthcare Expenditure Breakdown

In March 2013, we noted that the Russian government had committed itself to spending beyond its means after earmarking some US$1.1trn over 8 years for its healthcare system. The Ministry of Health had budgeted a rise in revenues for 2014 and beyond, expecting GDP growth above 3% in 2013 and 2014. We further noted that healthcare spending would unlikely be able to maintain the growth trajectory of the past five years, as peak oil prices subsided and supply rose globally. Our Country Risk analysts have grown progressively bearish towards the Russian economy over the course of 2013, as pressure has mounted on the Russian economic growth model. With our Oil & Gas team forecast the price for oil to average below the break-even price for Russia of US$110/bbl (the price at which the budget is balanced) over the next few years, there will be little leeway for expansion in expenditure by the state. Therefore, the slack will have to be picked up by Russian consumers.

Saudi Arabia: Focus Turns Towards Development Indicators In The Wake Of The Arab Spring

A relatively young population coupled with increasing total healthcare expenditure in Saudi Arabia is marking the country as one of the most attractive in the Gulf Cooperation Council region. Over the last decade or so, a relatively small population and inertia by the ruling family of the Saudi kingdom meant that the focus and will to spend on healthcare and other social benefits was low. Indeed, Saudi citizens were given 'gift payments', subsidised housing, healthcare and guaranteed state jobs in the early part of the decade, so the societal pressure to push for changes was low. Even as oil prices quadrupled over the decade between 2000-2010, healthcare spending merely doubled, reflecting the fact that the priorities of the state lay elsewhere. However, since the Arab Spring, Saudi Arabia's ruling family have felt the need to head off discontent by focusing on development and suppressing the root causes (namely youth unemployment and corruption) that lead to the overthrow of the regimes in Tunisia, Libya and Egypt.

Indeed, most Saudi patients would previously go abroad for healthcare to Western countries, but with the Saudi government instead hoping to improve the employment prospects of its growing, youthful population through a policy of "Saudisation", the emphasis is now on delivering the highest levels of care within the country itself, while employing as many Saudis to perform these tasks.

Arab Spring In 2011 Propelling Healthcare Spending Growth
Saudi Healthcare Expenditure Vs. Crude Oil Prices

Indeed, the government has budget for large scale infrastructure projects and diversifying its economy away from the petrochemical and petroleum sector, where the majority of the workforce are expatriates. Government healthcare spending is set to be increased by 30% in 2014, mainly going towards salaries and enlarging the country's medical workforce. Nevertheless, Saudi healthcare expenditure as a percentage of GDP will still fall largely below the 8% threshold that countries such as the UK or the Netherlands spend on healthcare. Over the next ten years, achieving this 8% goal will become increasingly difficult as the considerable trade surpluses that Saudi Arabia has enjoyed will narrow in line with declining oil prices.

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