The Kingdom’s 2007 budget announced by Custodian of the Two Holy Mosques King Abdullah is another remarkable document. It once again breaks records for spending on a number of things, the most important of which is yet even more substantial increases in education and training.
Continuing strong economic growth means that the government will be spending some SR380 billion ($101 billion) in the coming year while revenues are estimated to be running at SR400 billion ($106 billion). This latter figure is based upon a highly conservative estimate of oil prices and therefore is likely to be considerably greater at year’s end. The government is clearly determined to live within its means.
The campaign to retire national debt is notable. By the end of the current fiscal year, this debt will have been reduced to SR 366 billion, equivalent to 28% of GDP. Further repayments will come from surpluses in the coming year and analysts are predicting that domestic debt may be almost entirely retired within a few years.
This may not, however, be entirely desirable. The Kingdom’s domestic capital market is still in an early stage of development. Too much money has been chasing too few investment opportunities. This has led inevitably to a boom-and-bust cycle because market performance has not been driven by underlying fundamentals but by frothy investment sentiment. The recent correction in Saudi share prices will hopefully have taught investors a valuable lesson. There is plenty of good news underpinning the activities of Saudi companies busily engaged in the immense development that is part of the 8th Five Year Development Plan. Investors should be focusing on operational and financial performance and not simply on the opportunity for spectacular short-term capital gains. And it is here that the Kingdom can play an important role in the domestic capital market by an issuance program of widely tradable paper. In certain circumstances, short-term bills can be used to mop up excess liquidity or stimulate an otherwise sluggish market. The Kingdom, which once prided itself on having no debt, has accepted borrowing as a legitimate source of funding. Now it can also use debt issuance as a macro-economic tool.
The projected average GDP growth for the private sector of 6.3 percent conceals the dominant 10.1 percent contribution of the non-oil sector, leading which are the transport and communications and construction industries. The latter is involved in what is arguably, when taken as a whole, the largest civil engineering works ever undertaken anywhere in the world. The logistical and planning demands being made on our leading construction companies are astonishing. The demand for resources, whether top-flight planners or project engineers or simply construction steel and cement, is already producing price pressures. The management of the inevitable price inflation will therefore be a major challenge in the coming years. With the Kingdom’s finances in such a healthy state and optimism high, it may be hard to worry about inflation. But not to do so would be a mistake.
