Prosperous budget to drive expansion

Saudi economists have commended the Kingdom's national budget for 2013, saying it would stimulate economic growth. They expressed concern over the growing inflation and unemployment rates demanding corrective action.
"We thank God for all the blessings and our wise leadership for this prosperous budget," said Basil Al-Ghalayini, CEO of BMG Financial Group.
"As a continuation to the series of expansionary budgets of previous years, there are few sectors that will be absorbing a sizable share of this budget including health care, housing, education, transportation and renewables," he said.
"Although these numbers are quite promising for a sound and robust economy, there are still challenges to the government's development plans in terms of quality, efficiency and timing of completing these mega projects," Al-Ghalayini said.
He added: “There are concerns related to certain indicators including inflation, unemployment and oil prices, which may affect the outcome of this budget."
Fahad Alturki, senior economist at Jadwa Investment, said the budget was the largest in the Kingdom's history.
"The budget highlights again the government's intention to continue to stimulate the economy. Budgeted investment spending, raised by 28 percent to an all-time high of SR 285 billion, will support healthy economic growth and provide encouragement and opportunities for the private sector at a time of global and regional uncertainty," Alturki said.
"It was another expansionary budget with a record spending, which will play a vital role in supporting the economy," he added.
Preliminary economic data show that 2012 was a healthy year for the economy with real GDP growth of 6.8 percent. Nonoil private growth maintained a strong growth of 7.5 percent year-on-year, with construction and transport and communications sectors expanding at double-digit rates, he added.
"The budget announcement also showed another revision to the 2011 real GDP growth from 7 percent to 8.5 percent, the highest growth since 1979. Very high oil export revenues pushed the current account surplus to an all-time high of $ 178.5 billion (SR 669.2 billion)," Alturki said.
"We estimate that a price of $ 66 per barrel for Saudi export crude (around $ 70 per barrel for Brent) and production of 9.6 million barrels per day are consistent with the revenue projection contained in the budget. We expect both revenues and expenditures to be above the budgeted level and forecast a budget surplus of SR 165.3 billion
(6.7 percent of GDP) based on oil price of $ 104 per barrel for Brent," Alturki added.
"As expected another expansionary budget was announced today (Saturday) that projects +19 percent Y/Y increase in expenditure for 2013. We view the announcement positively, however, surprisingly the market did not react as strongly as it did around the same time last year," Asim Bukhtiar, vice president and head of research at Riyad Capital, said.
"Uncertainty in global markets for the year ahead appears to be dominating investors' attention. Outlook for crude is pointing to lower prices next year which may create headwinds for Saudi exports," Bukhtiar added.
"This is another strong sign from the government regarding continued investment in increasing the 'capacity' of Saudi Arabia. Areas such as education, health care, transport and infrastructure are the main recipients of spending in 2013; these are all "enablers" and will enhance the productivity and capacity of the country," Farouk Miah, head of equity research at NCB Capital, said.
"In the past several years, the expected revenues have been very conservative and we think this is also the case with the 2013 budget; we believe oil price of only around $ 70 a barrel is being used to make this projection. If oil prices remain stable, this will once again allow the government to spend more than budgeted, while also recording surpluses like in 2012," Miah added.
The Kingdom will continue its endeavor to diversify the economy and reduce its oil dependence. Evidently, the flurry of project finance sponsored by the government from petrochemicals to power and water projects is indicative of the adamancy to shift to value-added industries. Expanding the absorptive capacity of the Saudi economy to meet the burgeoning demand and employment needs of a youthful population is clearly a strategic orientation that was underscored in this year's budget, the National Commercial Bank (NCB) said in its budget analysis yesterday.
The resilient twin balances and the historically high oil prices will add to government coffers next year, which will sustain capital spending plans even further. Commendably, the government is still aware of the gyrations embedded in oil prices and as such the Shoura Council in November formally approved a proposal to set up a Sovereign National Fund (NRF) that will be under the supervision of the Supreme Economic Council. The fund will professionally manage and invest the budget surpluses to smooth economic cyclicality.
Even though SAMA's (Saudi Arabian Monetary Agency's) prudent strategy of seeking lower risk and higher liquidity at these turbulent times in the credit and money markets have served the country good, an active portfolio management will definitely require an independent body solely responsible for the enormity of handling SR 1.5 trillion in net foreign assets, the NCB report said. “The Saudi economy continued to grow above the average pre-crisis level in 2012, with real GDP registering 6.8 percent annual growth, driven by the oil and nonoil sector that grew by 5.5 percent Y/Y and 7.2 percent Y/Y, respectively,” Said Al-Shaikh, NCB group chief economist, said.
"Going forward, we project real GDP growth of 3.4 percent for 2013 due mainly to the projected slower growth in oil production, which will decline by nearly 200,00 bpd. However, this contraction in the oil sector will largely be offset by the nonoil sector, which is expected to grow by 7.4 percent, the second highest on record, driven by the
private sector, mainly manufacturing and construction,” Al-Shaikh added.