The 2010 budget at its core gives a few important messages to the private sector and the world: Saudi Arabia is committed to its $400 billion fiscal stimulus program through 2013. It is willing to sacrifice its fiscal position by incurring a small yet manageable budget deficit but it would hold on to its course. Another message is that the state has to not only spearhead the country’s drive to sustainable development at least for now but also help the economy recover fast. As the private sector is now becoming half of this economy’s annual output (47.8 percent of the country’s GDP in 2009) it too has to increase its domestic investments. The state has to be recognized for doing its duty of spurring private sector growth. The private sector certainly needs to expand, invest and nationalize its work force more. Of great importance are the continuous efforts to build public-private partnerships and for the trickle down between government and private sector to unfold unfiltered in the years to come.
Saudi Arabia’s 2010 budget shows a strong commitment to spending to help create opportunities for the private sector to establish and ingrain the necessary human and infrastructure skills to keep the economy on a sustainable growth pattern. If last year’s budget was the largest in the history of Saudi Arabia then the latest one is again a first for the Kingdom. In fact, the 2010 budget is three times bigger than the one for 2005. The spending that Saudi Arabia has embarked on is being done with no debt created in contrast to many other G20 countries. The overspending that the Kingdom witnessed in its budget in 2009 was in line with the overspending of the past years. However unlike in 2008 when it overspent by 27 percent, this time the Kingdom overspent by 15.7 percent, which is close to average overspending patterns of the past few years. It seems that the authorities are also cognizant of the fact that there can’t be runaway overspending.
In 2010 the private sector will continue to recover as well as the rest of the economy. Definitely it would be a better year than 2009, which was challenging given that the global economy went through its worst recession in the past 50 years. I expect real GDP in 2010 to reach at least 4 percent and inflation to be around 4.6 percent. Inflation does not seem to be a problem for the moment but it is still high for an economy that witnessed close to zero percent growth.
The greenback seems to be gaining strength and most likely will continue to do so in 2010. So not a lot of import inflation worry, but there are concerns of food prices rising again.
In 2009 the economy grew in real terms by 0.15 percent and, more importantly, the nonoil private sector grew by 2.54 percent which is lower than 2008, but it didn’t contract. The fastest growing sector in 2009 was transport and communication (6 percent real growth), followed by construction (3.9 percent), electricity, gas and water (3.35 percent).
But there were a few sectors that performed not so well given the challenges the private sector was facing in 2009. The industrial sector is an obvious one given the contraction in demand within Saudi Arabia and outside (due to a decline in exports). It grew by a meager 2.2 percent. In a slow economy, it is expected that wholesale, retail, restaurants and hotels would be hurt and as consumers spend less this year this sector grew by only 2 percent. Last but not the least, finance, insurance and real estate saw growth of only 1.8 percent. For finance 2009 was a difficult year and a very challenging one for global financial firms. Insurance continues to see gradual growth but its stellar performance is still awaited. Real estate entered in 2009 a wait-and-see phase. There are not that many buyers and there aren’t a lot of sellers and less real estate development (excluding construction) than anticipated.
We can’t avoid mentioning that an economy’s lifeline is the availability of money and credit. Although bank deposits (first 10 months) increased by 8.2 percent, which is not bad, bank claims on public and private declined by 5.7 percent. Banks have been risk-averse since December 2008 and they seem to be recovering as they are now lending more aggressively. 2010 will be a recovery year for bank lending compared to 2009 but we might not witness the stellar growth of 2008. Still banks in Saudi Arabia are healthy and banks’ capital and reserves for the first 10 months increased by 24 percent, which provides ample cushion and support.
Next year will be the year of reassuring recovery and confidence for the economy. Oil should hover at $70-$80, which should give enough protection to Saudi Arabia in terms of oil revenues. I estimate that the 2010 budget is calculated on a Saudi oil price of $44 and $48 for WTI and oil production is estimated at 8.5 million barrels per day, a slight increase from the 8.27 million of this year.
Some might ask how is all this money spent in the budget benefiting the people? Education is a key sector that is benefiting everyone and it will have positive and direct benefits. Education is a long-term investment and the changes are necessary in order to see the benefits return to the people. Without the right skills this country will not be able to compete and will not be able to have per capita income benefits and productivity improvements. Education accounts for 25 percent of the 2010 budget and witnessed an increase of 13 percent over 2009 budget. Saudi Arabia in 2009 built two schools every day. This is an accomplishment that very few countries can fulfill in a short period of time.
Another area that the government is committed to spending money on is health care and social affairs as well as infrastructure support. The Kingdom is a very large country, challenging the existing infrastructure due to tough climate. We tend to forget that the Kingdom is one-fourth the size of the continental United States or around four times the size of France. These are areas that the country needs to continually upgrade. Saudi Arabia is no longer a country of 7 million or 8 million people like it was in the late 1970s but a country of more than 25 million. This places particular pressure on the infrastructure, its quality and the needs of its citizens. However, Saudi Arabia looks into 2010 with confidence. It has exhibited no excesses or bubbles unlike some of the other countries in the region. It has saved the money and it is wisely spending it.
(John Sfakianakis is group general manager and chief economist at Banque Saudi Fransi, Riyadh)
