JEDDAH: The Saudi 2009 budget, which was unveiled by Custodian of the Two Holy Mosques King Abdullah on Monday, is more aggressive than those of earlier years. The government has budgeted for further expenditure despite a predicted fall in revenues. This reflects the need to reassure the private sector about the government’s ability and willingness to push ahead with its investment program despite the drop in oil prices. A deficit is budgeted for the first time since 2004.
Financing any budget deficit is not a problem, as it can be done by drawing upon the stock of foreign assets built up in recent years, the Riyadh-based Jadwa Investment said in its special budget report yesterday.
At the end of October net foreign assets at SAMA (the Saudi Arabian Monetary Agency) stood at SR1.67 trillion ($444 billion). The huge stock of assets that the government can call on gives Saudi Arabia an advantage over most other countries in alleviating the impact of the extreme financial pressures. They mean it can push ahead with strategic projects such as key infrastructure, oil, power and water and support the private sector where necessary.
The SR475 billion economic stimulus budget is up 16 percent as compared to the 2008 budget, the largest annual increase since 2006. It represents a 7 percent decline on actual spending this year.
Capital spending is projected at SR225 billion, up by 36 percent on the level budgeted for this year and over three times the actual level of just three years earlier.
According to Jadwa’s estimate the current spending is budgeted to rise by SR5 billion.
Improving physical and social infrastructure remains the key goal of government spending. Developing both is a priority because of the inadequacies of existing facilities and because it is a clear and quick way of passing on the benefits of the huge influx of oil revenues to the public.
“The increase in spending reaffirms the government’s commitment to proceed with its investment program. We think this is sensible given that lower project costs and raw material prices make the investment plans more affordable. It also sends an important signal to investors about the underlying health of the economy and the strength of government finances and should lift confidence, bolstering the stock market,” the Jadwa report said.
A record budget surplus of SR590 billion was recorded in 2008, with revenues of SR1.10 trillion versus expenditures of SR510 billion. This is well in excess of the SR40 billion surplus projected in the budget because oil revenues were far greater than budgeted. Government spending grew by a modest 9 percent.
Preliminary data suggest that Saudi Arabia’s economic performance was reasonable this year. Real GDP (gross domestic product) growth picked up to 4.2 percent owing to a rise in oil output. However, non-oil private sector growth slowed to 4.3 percent, the weakest performance since 2003. Bumper oil revenues helped lift the current account surplus to a record SR566 billion, though non-oil exports rose by only 10 percent.
Jadwa forecasts a budget surplus of SR89 billion next year. This is because oil revenues will exceed the budgeted total. It puts total oil revenues in the budget at SR560 billion and non-oil revenues at SR90 billion.
According to Jadwa, this year’s budget was based on an oil price of $45 per barrel. With just over a week of the year to go, it seems likely that the actual price of Saudi oil will average close to $95 per barrel. Total revenue in 2008 is well over double the level of just four years earlier and on a par with the combined total for the years 1993 to 1999.
Slumping private investment, combined with an expected 12 percent reduction in crude oil production and shaky confidence among private consumers, indicates that the Saudi economy is set to shrink by around 1.5 percent in real terms in 2009. Growth should rebound to around 4.2 percent in 2010, as crude output is stepped up and investment growth begins to recover, the Riyadh-based Samba Financial Group said in its report “Saudi Arabia: The 2009 Budget and Macroeconomic Prospects,” which was released yesterday.
On the real estate front, in a bid to meet spiraling demand, Saudi Arabia is in the midst of a frenetic period of construction of private and commercial real estate. Housing shortages within the low-to-middle income segments remain particularly acute and this deficit could well be exacerbated as the pending mortgage law stirs demand among a wider section of Saudi society. Expatriate demand is also a key driver. These fundamentals should help shield Saudi Arabia from the full impact of the global downturn in real estate. This downturn has hit hard in those Gulf states where speculative foreign investment in property has been a key growth driver.
“This year inflation was a serious and pressing issue for Saudi Arabia. From an annual average of just 4 percent in 2007, 12-month consumer price growth accelerated to a peak of 11.1 percent in July.
Nevertheless, price growth has since eased — though remaining high — and the outlook is for moderating inflation in 2009 and 2010,” Howard Handy, general manager & chief economist of Samba, said.
Samba said in its report that total external debt declined by around 3 percent to some SR281 billion by the end of 2008. Loans from banks to Saudi institutions surged by SR30 billion in the first quarter of 2008 as expectations of a revaluation of the exchange rate mounted. These expectations ebbed in the second quarter, while the intensification of the global credit crunch in the third quarter suggests that overall external debt is likely to have increased only slightly during the course of the year. Rapid economic growth means that external debt is equivalent to only 15 percent of GDP. Moreover, given SAMA’s buildup of foreign assets, net external debt is heavily negative and diminishing, Samba said in its report.
However, the Saudi budget failed to make any major impact on the stock market. The Tadawul All-Share Index (TASI) closed 4.15 points down at 4,743.89.