JEDDAH, 19 December 2006 — Saudi Arabia is the largest and most important economy in the Middle East. In 2006 gross domestic product reached SR1.3 trillion ($347.9 billion) compared to our 2006 forecast for Iran ($202.1 billion) and the UAE ($157.4 billion). The Kingdom will witness a record budget surplus of SR264.75 billion ($70.6 billion) in 2006 compared to last year’s SR214.13 billion ($57.1 billion), or a 23.6 percent year-on-year increase. This is the Kingdom’s fourth budget surplus in a row.
Oil exports reached a staggering SR729 billion ($194.4 billion) compared to last year’s SR609 billion ($162.4 billion). The government will allocate SR105 billion ($28 billion) toward paying off government debt. In 2006 government debt is expected to decline to 28 percent of GDP, or SR366 billion ($97.6 billion) compared with 40 percent last year and 119 percent in 1999. Government debt is held within the country, 80 percent by state institutions, such as GOSI and the Pension Fund, and the rest by domestic banks.
We believe that most of that debt was paid off through these two state institutions. We do not foresee a need in the near to medium term for the government to seek loans from the local market. Lastly, the Saudi Arabian Monetary Agency’s foreign asset position is stronger. As of October 2006, SAMA’s foreign assets reached SR808.5 billion ($215.6 billion). By year-end we anticipate foreign assets to reach SR836.2 billion ($223 billion), offering more than 41 months of import cover.
Inflation increased by 1.8 percent from last year’s 0.4 percent. The increase is reasonable given the high economic growth the economy is traversing and the supply bottlenecks that we are witnessing in construction, real estate as well as the labor market. Placed in a regional context, Saudi Arabia’s inflation is one of lowest in the region. The cost of doing business in the Kingdom is more competitive. The macro economic and fiscal position of the economy is impressive and will be sustained even if oil prices move below the $50 threshold that OPEC seems to be ready to defend.
Actual government spending reached SR390 billion ($104 billion), an increase of 16.4 percent from projected spending a year ago. According to the government, the increase in spending is due to the projects in the two holy mosques, subsidies, increase in appropriation to cover higher admission in universities and scholarship programs.
Total revenues for 2007 are projected at SR400 billion ($106.6 billion). Government spending for 2007 is expected to decline by 2.6 percent, reaching SR380 billion ($101.1 billion). Although we believe that projected revenues will be easily met we find fiscal discipline to be a major characteristic driving next year’s budget.
Even if Saudi Arabia’s oil production declines in 2007 in support of OPEC’s decision to reduction oil output we firmly believe that government projected revenues will be met. The 2007 budget is based on a SABB-estimated $38 per barrel.
Real GDP growth will grow in 2006 at a healthy rate of 4.2 percent compared to last year’s 6.5 percent. Again, the decline should not be alarming given that the Kingdom has witnessed continuous real growth rates averaging above 5.6 percent since 2003. Private sector growth is estimated to grow strong by 6.3% in 2006 compared to 6.7% in 2005.
The slide decline in private sector growth is due to a slide downward adjustment in private consumption particularly in the wholesale, retail, restaurants and hotels business (5.2 percent compared to 6.2 percent in 2005). As anticipated, construction continued to show signs of high growth rates (6.3 percent compared to 6 percent in 2005).
The 2007 budget furthers the government’s attention on needed investment in human capital development, education, health, infrastructure and job creation. Education and manpower development amounts to SR96.7 billion ($25.7 billion) compared to SR87.3 billion ($23.2 billion) in 2006.
Some 2,000 new schools will be built in addition to 4,800 schools currently under construction.
The new budget includes opening four new universities in Tabuk, Albaha, Najran and a women’s university in Riyadh. Also in the works are a new university hospital (in addition to five university hospitals under construction), building 56 more colleges and opening 19 new colleges.
Technical and vocational training is of paramount importance to job creation in the Kingdom and the new budget includes 7 new technical colleges, 12 technical and vocational training centers and opening of 5 new technical institutes for girls and 9 vocational training centers. The new budget includes appropriations for the national plan for science and technology.
Health and social affairs expenditures will reach SR39.5 billion ($10.5 billion) compared to SR31 billion ($8.2 billion) last year. New projects include 380 primary care centers and 13 new hospitals. There are 64 hospitals under construction, adding 9,850 beds to the country health care provisioning system. Also, the budget includes funds to support poverty reduction programs and increase in handicapped allocations.
Municipality services expenditures will reach SR15.5 billion ($4.1 billion) compared to SR13.4 billion ($3.5 billion). Transportation and telecommunications expenditure will amount to SR13.6 billion ($3.6 billion) compared to a bit more than SR11.5 billion ($3 billion). Around 8,000 km of new roads will be paved on top of the 16,000 km of roads under construction. Finally, water, agriculture and infrastructure sector will receive more than SR 24.8 billion ($6.6 billion) compared to SR22.5 billion ($6 billion) for 2006 of which SR16.4 billion ($4.3 billion) will be used for water, sewage and desalination projects.
The macro economic situation propelled by high oil prices is expected to continue, allowing the Kingdom to deepen its development objectives in the years to come.
(Dr. John Sfakianakis is chief economist of SABB.)
