JEDDAH: The Saudi private sector is being urged to continue their spending plans in line with Saudi Arabia’s 2010 budget, which sends a clear signal that the country is committed to continuing its state spending program without resorting to debt financing.

The budget projects a 14 percent increase in state expenditure this year to a record level of SR540 billion. The government has stepped up to the plate in terms of generating momentum behind an economic recovery in hopes the private sector will reciprocate, according to John Sfakianakis, group general manager and chief economist at Banque Saudi Fransi (BSF), who addressed an elite group of BSF customers in Jeddah this week.

The new Saudi budget anticipates a deficit of SR70 billion on revenues of SR470 billion after a smaller than anticipated shortfall of SR45 billion in 2009.

According to Sfakianakis this indicates the Saudi government is using a conservative Saudi oil price of $44 a barrel to determine its budget. Oil prices recovered in the second half of the year and averaged $62 a barrel in 2009.

Sfakianakis said the government had been drawing on foreign assets for most of the year in 2009 to support spending in various sectors of the economy.

In October the Saudi Arabian Monetary Agency’s (SAMA) net foreign assets rose 2.26 percent, but were still down 11.2 percent from their level in December 2008. But SAMA’s foreign assets have been deployed, within the principles of a stabilization fund, in order to support the economy in difficult times, said Sfakianakis.

He said Saudi Arabia has succeeded at reducing domestic debt to very manageable level last year even though oil income was not as high as previous years.

Saudi Arabia’s outstanding domestic debt stands at SR225 billion, down 5 percent from 2008 and about 60 percent less than 2002 levels.

Saudi Arabia’s debt, which was 16.3 percent of gross domestic product (GDP) in 2009, was among the lowest for members of the G20 and the only member of the G20 that is on a debt-lowering track to GDP levels in 2010.

The debt will fall to 13.8 percent of GDP in 2010 even as debt-to-GDP ratios soar in developed markets in the fallout of the global financial crisis.

Saudi Arabia posted a current account surplus of SR76.7 billion last year, which looked strong against the backdrop of global recessionary conditions.

The surplus was helped even as exports (both oil and nonoil) dropped as imports declined to lower than expected levels due to lower domestic demand and drop in their value.

According to Sfakianakis, last year the education budget rose almost 17 percent to SR121.9 billion. The Saudi economy grew 0.15 percent in 2009, while the nonoil private sector grew 2.5 percent.

The private economy no doubt contracted in 2009 and while the private sector would do better in 2010 but recovery would not be as robust as some might expect, Sfakianakis said. He added banks would lend more, but not anywhere close to the levels witnessed in 2008, while appetite from the private sector would be more measured.

Liquidity is also subdued in the local stock market, as investors have been observing rather than actively participating, Sfakianakis claimed.

Sfakianakis said the Saudi economy would grow by 3.9 percent in 2010 as private sector loan growth recovers and state fiscal outlays provides economic stimulation.

He also expected average inflation to reach 5.1 percent in 2009. He said prices stemming from domestic housing shortages as well as rising import costs, particularly of foodstuffs, are likely to keep inflation levels historically high in 2010.

“Markets are tempted to believe that things are starting to return to normal,” said chief economist and head of fixed income markets research at the Paris-based Credit Agricole-Calyon, Herve Goulletquer, commenting on fixed income markets.

“However, we must admit that this environment will be murkier, which will make traders and investors more conservative. Notwithstanding the recovery process, medium-term economic prospects remain uncertain,” he added.

“De-leveraging, de-regulation and de-globalization are set to weigh on potential growth. Fiscal and monetary policy tightening will eventually be delivered. This will add to the global uncertainty over the economic outlook, with a non-trivial impact on asset prices. The ‘Great Moderation’ era is likely to be followed by a period of higher macro volatility.”

Goulletquer also added that risk aversion would not come back to the low level reached before the crisis.

There is no indication that markets have changed their return expectations, while a medium term return of about 6 percent would remain as a reference for a balanced portfolio, he said.

Goulletquer, however, claimed that there is uncertainty that global economic expected performances would allow for this level of medium-term return for a balanced portfolio to be reached with the significant weight given to bonds and stocks from both the US and Europe.

“The temptation to invest more in emerging and commodity markets would grow, with a serious risk at the end of an asset price’s overvaluation. The quest for yield in an environment characterized by relatively low growth and lack of visibility will be a dominant theme in the coming quarters,” he said. Risks to projects are there as well, he added.

Domestic demand may not recover fast enough to support growth in 2011, Goulletquer said, adding labor market conditions could deteriorate further, which could impact on wages and savings behavior.

He revealed the debt of non-financial corporations has risen recently and that the need to de-leverage could further dampen investment.

Credit Agricole-Calyon projections assume a “no-budgetary policy change” in the course of 2011, except at the end of the stimulus plan, Goulletquer said.

However, public finances will deteriorate further and governments will have to cut expenses or increase taxes to stabilize government debt-GDP ratio, he said, adding this could happen in 2011 and weigh on growth.

“Economic growth in 2010 is expected to be not too far from trend, but this is well below the growth rate that one would expect from a recovery in a severe recession. The pace of economic recovery is expected to be restrained by household and business uncertainty, weak labor market conditions and the slow waning of tight credit conditions in the banking system, warranting a low Fed funds rate until the spring of 2010,” Goulletquer said.

“Economic recessions are having an asymmetrical impact on oil demand, impacting gasoil demand more than gasoline demand. Refiners, having to meet gasoline demand, have produced gasoil in excess, which has been put into stocks. As we move to winter demand, these high gasoil stocks put pressure on refinery margins and will depress crude oil demand in the coming months.

“The global growth recovery may be anemic but the US looks likely to be the outperformer among developed markets. The potent policy response combined with economic flexibility looks set to deliver the bigger swing in the US. The US economy may lead the economic recovery, but this does not necessarily mean it will lead the interest rate move. The Fed is more focused on the output gap concept, the suggestion being that sub-par growth during the recession has opened up a large negative output gap. This means it will take successive periods of above-potential growth to close the gap and create inflation. As a result, it will likely be Q2 of 2011 before the Fed starts to tighten.”