The Arabian light average spot prices has reached $107.8 a barrel in 2011, a 38.9 percent increase compared to 2010 average prices. In addition, the increase in oil production has supported revenues, with Saudi oil production averaging 9.2 million barrels per day  in 2011, around 1.0 million bpd higher than last year's 8.2 million bpd. Consequently, the published pre-closing figures for the current fiscal year ending Dec. 2011, showed total revenues of SR1.11 trillion, of which SR1.03 trillion represented direct oil revenues, a 105.6 percent increase over 2011 budgeted revenues.
 

This year's expenditures are estimated to have reached SR804.0 billion, representing 38.6 percent increase above budget and about 23.0 percent higher than actual expenditures in 2010. Capital expenditures continued its upward trend since 2004, posting an estimated SR225.0 billion, 13.2 percent higher than 2010. Meanwhile, additional capital expenditure amounting to SR11.0 billion have been financed from excess surpluses of previous budgets. The royal decrees issued in February and March will continue to have expenditure repercussions far beyond 2011 into the medium-term horizon. In 2011, the implications had been witnessed through two channels, permanent fiscal measures and one-time transfers. The permanent measures included an increase in minimum wage in public sector, the 15 percent cost of living allowance being fixed in the employees salaries, and an increase in social security, while the one-time transfers encompassed a bonus of two months salary, additional allocations to both the Real Estate Development Fund and the Saudi Credit and Saving Bank. Nevertheless, capital expenditure represents the majority of the new initiatives, which will be spread over several years, pertaining to building new housing units, expansion of hospitals, and restoration of mosques, a figure estimated at around SR280 billion, the NCB report said.
 

The current account increased to reach $159.7billion (or 27.6 percent of GDP), compared to $66.8 billion last year, registering 139.2 percent increase due to higher oil export earnings. Imports also increased marginally by 2.2 percent to reach $98.8 billion, compared to an increase of 11.9 percent last year. Over 10 months of 2011, net foreign assets with SAMA (Saudi Arabian Monetary Agency) have increased to $520 billion from $441 billion at the end of 2010, leaving official foreign reserves at a very healthy position covering more than 66.4 months of imports, a historical record.
 

The Saudi government domestic debt was reduced further to SR135.5 billion, amounting to 6.3 percent relative to GDP. Even though the government has more than enough reserves to pay off the entire debt, it opted out from such direction, especially that the cost of servicing the debt is currently low. The government, justifiably, prefers rather to spend this money to finance expenditure plans at home or to diversify investments abroad. Evidently, it is important to keep a level of sovereign debt as a monetary tool to manage money supply and as a benchmark for pricing corporate bonds and sukuk. Notably, SAMA continued its proactive strategy this year and increased the issuance of treasury bills by SR34.9billion in 2011 to replace matured government bonds, which amounted to SR14.2 billion, to avoid a surge in liquidity.
 

The fiscal policy stance will continue to be expansionary. The 2010-2014 9th Five-Year Development Plan allocation of SR1.44 trillion to capital expenditures, 67 percent more than the previous plan, have underscored the government's commitment to prop-up outlays to all sectors. The 2012's budget, in this context, continues to reflect the government's focus on long-term sustainable development that requires investment in infrastructure, education, health care, and social and economic development projects. As expected, education and training continued to be central to the aforementioned strategy, receiving 24 percent of total allocations, with health accounting for 12.5 percent of the budget. The 2012 budget release estimates revenues and expenditures at SR702 billion and SR690 billion, respectively, projecting a budget surplus of SR12 billion. However, according to the NCB, revenues are underestimated, and the government will still manage to record a surplus in 2012.
 

Although the budget press release does not provide oil price and production level assumptions, NCB believes that both revenues and expenditures are understated. Based on announced revenues, government assumed next year's oil prices to average $64 a barrel. "With forecast of 95 a barrel for the average Arabian light spot prices and an 8.8 million bpd for average oil production in 2012, we project revenues and expenditures at SR930 billion and SR780 billion, respectively. This would lead in turn to a budget surplus of SR150 billion, or 7.1 percent of estimated GDP in 2012," the NCB said in its report.
 

The budget still focuses on capital expenditures. Out of SR690 billion, around SR425 billion or 61.6 percent is allocated to current expenditures, largely to pay for wages and salaries. The remaining SR265 billion is allocated to capital expenditures, representing around a 3.5 percent increase compared to 2011. The budget prioritizes spending on physical and social infrastructure development, namely education and health. However, based on historical evidence actual capital expenditures will end up well below budgeted figures. Therefore, NCB projects capital expenditures at SR234 billion in 2012, while current expenditures at SR546 billion.
 

According to the announcement, around SR86.1 billion in 2012, representing a significant rise of 85.3 percent, will be disbursed by specialized credit institutions to finance industrial projects and to support social and human development, thus, complementing the recent pickup in banks' credit growth to the private sector that recorded 10.0 percent in October 2011, the fastest pace since April 2009. A case in point is the second phase of Maaden's aluminum project, whereby Public Investment Fund (PIF) and Saudi Industrial Development Fund (SIDF) extended loans worth $1.2 billion that will be repaid over 16 years starting 2017. Concurrently, the allocation will be used to reduce poverty and unbalanced regional growth. Commendably, in September, the Cabinet approved incentives to investors in seven underdeveloped regions, which necessitated an alteration in SIDF law. The newly altered law will include, notably:(1) loans worth between 50-75 percent of a project's value either as new or for expansion, and (2) a grace period of 20 years to repay the loan. In our opinion, these new incentives will provide a much needed impetus for job creation and industrial development.
 

Based on forecast of oil prices at $95 a barrel, the NCB projects a fiscal surplus of SAR150 billion or 7.1 percent of GDP. This will result in oil revenues of SR848 billion, representing a decrease of 17.8 percent compared to actual oil revenues in 2011, which also takes into account a 4.6 percent decline in export volume. Nonoil revenues are also expected to reach SR82 billion, 5.2 percent above actual level in 2011. Actual expenditures will most likely exceed budgeted expenditures by 13.0 percent to reach SR780 billion. The government's expansionary policy remains in place reflecting its commitment to support the economy and enhance infrastructure.
 

The Kingdom's inflation is likely to remain suppressed, registering 4.8 percent in 2012, largely driven by reduced imported inflation. Cost-push pressures over the short-term had clearly reversed direction since commodities are on course for the first annual drop in three years. Food prices, will keep inflation in check, as reflected by the S&P Goldman Sachs Agriculture Index that posted a 21.3 percent fall in 2011. Against this backdrop, local food prices that soared to 7.6 percent in 2010, from just 1.0 percent in 2009, is expected to remain range-bound around 5 percent for the remainder of 2011 and early 2012. The strong appreciation of the USD against the EUR and GBP by around 8.2 percent and 4.1 percent since August will most likely continue into next year, thus, underpinning the slide in imported inflation. Additionally, on the domestic front, rental inflation will continue to be the prime contributor to inflation, albeit at a slower pace of increase, as witnessed since Q3, 2008.
 

The fiscal policy stance remains expansionary in the 2012 budget in both nominal and real terms. This reflects the government's commitment to expand the economic capacity and to enhance physical and social infrastructure to meet the burgeoning demand and employment needs by a youthful population.

The robust fiscal and external positions and the elevated oil prices will allow the government to simultaneously sustain its capital spending plans and amass foreign reserves. Even if oil prices decline more than anticipated given the strong global economic headwinds, the significant net foreign reserves coupled with a low level public debt will comfortably make it possible for the government to achieve its budgeted expenditures.

The government will continue its endeavor to diversify the economy and reduce its dependence on oil. The flurry of project finance sponsored by the government from petrochemicals to power and water projects, indicating adamancy to shift to value-added industries. The NCB expects real GDP growth of 2.3 percent for 2012 due mainly to base effects, including projected lower oil production by nearly 400,00 bpd, and the royal decrees announced in first quarter of 2011, which injected one-time transfers estimated at around SR94 billion, representing around 4.3 percent of 2011 GDP.