RIYADH: The 2009 budget offers two surprises. First, it is expansionary at a time when the global economy is in a spending turmoil. Saudi Arabia outlined a spending program that should offer encouragement to the private sector. Second, actual spending in 2008 increased by SR100 billion ($26.66 billion), which is more than 24 percent of budgeted spending.
The authorities are quite aware that 2009 will be a difficult year for oil revenues and a deficit is forecast of SR65 billion. This could easily be covered by tapping into the huge foreign asset pool of more than $450 billion in foreign assets managed by the Saudi Arabian Monetary Agency (SAMA).
People tend to have short memories, hence we should not brush aside the fact that in 2008 Saudi Arabia registered its largest surplus in its history (SR590 billion) while other countries in the G-20 are trying to contain their budget deficits and some are even on the verge of receiving International Monetary Fund (IMF) bailouts.
Oil revenues are estimated to reach SR1.13 trillion in 2008, another record high for the Kingdom. Also, we tend to ignore that Saudi Arabia could cover its expected budget deficit if oil revenues remain above SR450 billion in 2009, not an entirely implausible scenario. The budget is calculated at an oil price of $37 per barrel. The only downside risk to this scenario is oil production. That will remain the biggest issue going forward as OPEC tries to cut additional production.
This is not saying that there are no challenges that lie ahead. From the preliminary government estimates, it is obvious that real GDP for 2008 declined more than most had expected. A real GDP of 4.2 percent is certainly more than the 3.4 percent growth witnessed in 2007, but certainly bordering its capacity to generate sustainable employment growth figures.
Real GDP did not fall in 2008 due to merely a decline in oil output but clearly also due to a decline in nonoil private sector growth that witnessed a drop from 5.8 percent in 2007 to 4.3 percent in 2008.
The decline in nonprivate sector activity took place against the backdrop of a substantial increase in actual spending. It is exactly these figures that compelled the authorities to step in and announce an expansionary budget.
Given the limited financing opportunities for 2009 for the Saudi private sector globally and regionally, the authorities need to deploy their own fiscal measure to contain private sector contraction. Such measures are not new. Although counter fiscal measures in the 1980s and 1990s were evidenced, the budget for 2009 is by far the largest. This can be clearly observed through the amount of announced capital expenditure that will be undertaken in 2009.
Capital expenditure is set to increase by 36 percent in support of the government’s infrastructure program that should have obvious trickle-down effects for the rest of the economy and especially the private sector. The increase in capital expenditure is a marked departure from previous periods when oil revenues dropped dramatically. For example, in the 1998 budget when oil revenues dropped by 50 percent, capital spending fell by 14 percent.
Inflation, which has been of increasing worry to many, seems to be on a fast and declining trend. An inflation rate of 9.2 percent this year is still very high compared to Saudi Arabia’s average inflation of 2.3 percent in 2006 or 0.5 percent in 2005.
Going forward, the challenge is not inflation but growth. As we are going through one of the deepest deflationary periods in the global economy, Saudi Arabia is set to become a net importer of deflation. Hence, inflation should fall in Saudi Arabia in 2009. Of acute importance are the competition mechanisms of the economy so consumers feel the benefit of lower import costs. Of particular importance is the role of the newly created Consumer Protection Agency by the Ministry of Commerce and Industry.
Government debt has been reduced which is a good sign although we believe that some debt is not too bad in order to manage liquidity. Debt at 13.5 percent to GDP is now at a very healthy rate.
Last but not the least, the budget outlays continue to place emphasis on the critical sectors of the economy, including education, health, infrastructure and municipal services. All of the above received additional funding that should affect citizen’s life as well as create the mechanisms for sustainable development.
There are often two errors made by many when they try to account for the efforts of the Kingdom to improve its physical infrastructure and human resources. First, that the investments in the above will have an immediate result. Such structural changes take time and are generational alterations. It is easy to build schools and universities but much more time-consuming to retrain the teachers. Little credit has been bestowed on Saudi Arabia for the progress it has made. In 1970, Saudi Arabia had a literacy rate of 15 percent for men and 2 percent for women and by 2005 adult literacy, according to the UNDP, had reached 83 percent and more women than men were going to university.
Second, the accusation that the government is not cognizant of the challenges the Kingdom is facing is an erroneous assumption. The authorities are aware and are taking steps to reverse structural impediments but these take time. The questions that need to be asked now are how the market will react, the degree of actual spending or over-spending the government will undertake in 2009 and how long the global recession will last.
(John Sfakianakis is chief economist at SABB [Saudi British Bank].)
