JEDDAH: Despite the global financial crisis, Saudi Arabia remains adamant in pursuing economic as well as structural reforms that promote privatization, and develop a business-friendly environment which will attract foreign and private investment.
The Kingdom will face some challenges this year, largely due to the fall in crude oil prices and cut in its oil production in line with the decision of the Organization of the Petroleum Exporting Countries (OPEC). In addition, tighter and more expensive borrowing may lead to an overall slowdown in economic growth in 2009, the Jeddah-based Financial Transaction House (FTH) said in its latest Economic Insight: Saudi Arabia 2009 report.
“The Kingdom’s 2008 revenues have been at record levels, with a hefty surplus. Thanks to the high oil prices seen earlier last year, peaking at $147 a barrel, the average oil price for 2008 was about $95 a barrel. This will allow the government to maintain expansionary spending, instilling investor confidence, and planning to maintain work on all current and planned projects,” Faisal Alsayrafi, managing director and CEO of FTH, said.
He added: “The 2009 budget was calculated based on the assumption that oil prices would be on average at $36 a barrel, which is a highly conservative estimate, and would actually expect to see the government at a surplus within 12 months.”
Alsayrafi said the reduced oil prices have also led to a decrease in commodity prices, which has greatly helped bring down the record high inflation of 11.1 percent witnessed earlier last year.
Finance Minister Ibrahim Al-Assaf, while speaking to newsmen on the sidelines of the Third Global Competitiveness Forum in Riyadh last week, said Saudi Arabia was doing its best to maintain a low inflation rate. The recent data showed Saudi Arabian inflation eased to 9 percent in December.
Although the Kingdom is sheltered from the global storm, the sudden drop in oil prices and the tightened lending conditions have left the government anticipating a deficit in this year’s budget for the first time since 2004. Nonetheless, the deficit should be easy to manage and cover based on deploying current assets, as well as the 2008 staggering surplus — SR590 billion — a 1,375 percent increase on the budgeted surplus of SR40 billion, the FTH report said.
According to the report, fiscal performance was the strongest ever recorded in the history of Saudi Arabia in 2008.
As a result, actual spending increased by 24.4 percent above its target. Spending was up by 9.44 percent to the 2007 level compared to the 18.56 percent level in 2006. The budget surplus of SR590 billion was the largest ever.
It was far higher than the 2007 record figure of SR176.5 billion due to the fact that oil revenues grew by 35 percent in nominal terms even though spending was quite aggressive and above expectation.
Spending also hit a record high in 2008. Most of the budget surplus was used to build up foreign assets at the Saudi Arabian Monetary Agency (SAMA), the central bank, and to reduce domestic debt which reached 13.5 percent of GDP (gross domestic product).
Similarly, investor confidence was boosted by the new budget which plans to sustain a fair portion of spending, regardless of the current global recession. Government spending will be essential in both the public arena, in supporting the development program, and also in the private sector.
Budgeted expenditure for 2009 is SR475 billion, a 16 percent increase from budgeted expenditure in 2008.
“The rigorous expansion promises to provide a much needed boost to the local economy in a time where financing has become a serious concern for all private corporate entities. Although this aggressive expansionary plan, coupled with an expected decrease in oil revenues, does leave the government anticipating a deficit of SR65 billion, financing this should not be a problem, as net foreign assets at SAMA as of October 2008 stood at SR1.69 trillion,” Alsayrafi said.
He said since the majority of the $600 billion worth of projects currently under way or planned in the Kingdom are reliant on funding from the private sector, this does offer some reassurance for the health of the economic boom.
Of the Kingdom’s current and planned projects, 51 percent is for construction; 21 percent for petrochemicals; 19 percent for oil and gas, 13 percent for power and 3 percent for water.
The FTH report also said equity financing will be a less attractive option throughout 2009, with global stock markets tumbling including Saudi Arabia, and demonstrating high volatility.
The Tadawul All-Share Index (TASI) closed 2008 with a mounting loss of 6,236 points, over 56 percent. The index is down only 37.07 points so far this year.
Thus there is little incentive for companies to raise capital on the market while shares are extremely undervalued, which has led to about 80 Saudi companies, with a collective value of about $19 billion, postponing their IPOs (initial public offerings).
“All technical indicators are currently under great pressure and point to a technical rebound, however there is no substantial or positive news to support a sustained rebound, and while many investors look to take advantage of the situation, we find it is never wise to try and catch a falling knife,” Alsayrafi added.
