The Kingdom’s budget announced this week, with its reduction in spending and a record SR45 billion deficit, is no surprise. There had been plenty of warnings that next year was not going to be an easy one, not least from Crown Prince Abdullah who a fortnight ago said that the country would have to tighten its belt. Despite attempts by OPEC to cut global oil production, the pressure on the price of oil, still the driving force for so much government expenditure, is set to remain downward for the foreseeable future.
Indeed, it looks as if the government expects the downward pressure to intensify. Oil analysts had predicted that the price of Brent Crude, the benchmark price, would be around $18 a barrel next year, down from this year’s $24. But on the basis of a budget revenue of SR157 billion next year - SR44 billion of which will be non-oil income - the authorities apparently anticipate a price of around the $16-$17 mark. That is uncomfortably low. It must be hoped that the government’s forecasters have erred on the side of extreme caution and that the price will be slightly better. Better to be pessimistic and proved pleasantly wrong rather than optimistic and face a disaster.
Nonetheless, the budget is bound to worry many. Last year’s budget of $215 billion had no room for new developments. All it could do was to cover running costs. Those costs are not going to go down next year. Add to them the cost of infrastructural deterioration, and it is quite clear that belt tightening, as the Crown Prince Abdullah warned, is going to have to be the order of the day. That makes the government’s rejection of foreign borrowing to fund the deficit all the more surprising.
The repatriation of Saudi investments abroad — estimated by US bankers Merrill Lynch at $750 billion — is the goal which everyone approves in principle but all too few are willing to put into practice. It is worrying. If Saudis do not lead the way in the Kingdom, what chance is there of foreign investors coming in? In fact, there is every reason to believe that Saudis would like to invest at home but are deterred by the limited opportunities available. They are not going to bring their money back and put it in a current account with no return. It has to work for them. The government is missing an opportunity if, as in the past, it goes to Saudi banks to fund the budget deficit. If it issued treasury bonds instead, Saudi investors would lead the rush to buy them. They are already major purchasers of US bonds. They know that Saudi bonds would be as safe as houses; and at the same time they would be doing the country a favor. Such instruments would be a perfect way of repatriating Saudi investments from abroad.
The trouble is that to issue bonds, the Kingdom requires a rating from one of the internationally recognized rating agencies. Without one, the cost of raising funds by a bond issue would be enormous. How much better for the Kingdom though if the authorities were to bite the bullet and applied for one, with all that it involves. Bonds can meet not only next year’s debt, they would also provide the mechanism whereby Saudi investments abroad can be channeled back home for all those cherished infrastructural projects that need funding and which will, in the long term, pay handsome dividends.
