THE sharp correction in oil prices and drastic crude oil production cuts have brought down Saudi Arabia’s revenues by more than half in 2009. This, together with higher than budgeted expenditures, turned the fiscal balance into a deficit of SR45 billion (or 3.3 percent of GDP), compared to a peak of SR581 billion (or 33 percent of GDP) in 2008. While this accounts as the first budget deficit since 2002, it remains small both in nominal terms and relative to GDP (gross domestic product) compared to the 1990s, when the government was plagued by persistent deficits in excess of 30 percent of GDP and massive debt burdens. Fiscal revenues came in higher than budgeted, owing to higher oil prices in the second half of 2009, the National Commercial Bank (NCB) said in its Saudi Arabia’s 2010 budget report.
After remaining range bound between $40-$50 a barrel in the first five months of the year, Arab light spot prices started to move higher in June to an average of around $70 a barrel in the second half of 2009. As such, actual revenues stood at SR505 billion, which is 23 percent higher than projected in the budget. Relative to 2008, actual revenues fell by over 50 percent in 2009. But since 2008 was an exceptional year due to the oil price boom, it should not be used as a benchmark for comparison, the report said. In fact, actual revenues are estimated to be around 37 percent of GDP, which is somewhat comparable to the levels attained before the oil price boom in 2008.
Despite the sharp decline in oil revenues, the fiscal policy stance remained highly expansionary. Actual expenditures are estimated to have come in at SR550 billion, around 16 percent above budget and 6 percent higher than actual 2008 levels. The non-oil deficit, a measure of the contribution of the fiscal stimulus to domestic demand, has increased to 36 percent of GDP from 23 percent of GDP in 2008, the NCB report said.
In line with the anticipated decline in oil revenues, it appears that the government has exercised some restraint in current expenditures this year. It was probably the case that lower inflation and wage pressures throughout most of 2009 have aided the government in doing so.
With limited access to foreign capital and tight domestic credit conditions, government investment authorities, like the Public Investment Fund (PIF), have taken additional measures to provide funding for infrastructure and industrial projects. In particular, the PIF raised the cap on lending from 30 percent to 40 percent of project value and extended loan duration from 15 to 20 years. More significantly, government institutions are financing projects through larger shares of equity holdings.
Current account surplus
Saudi Arabia’s current account surplus fell to $20.5 billion (or 5.5 percent of GDP), compared to a peak of $134 billion last year. This is largely due to lower oil export revenues. Imports also fell by 21 percent, on the back of lower global commodity prices rather than on a volume basis. This has lessened the impact on the total stock of foreign reserves. Over the first ten months of the year, net foreign assets, managed by SAMA (Saudi Arabian Monetary Agency), have decreased by around 11 percent to $390 billion from $439 billion in 2008. Nevertheless, official net foreign assets remain at a healthy position, equivalent to approximately 30 months of imports. SAMA’s net foreign assets are expected to recover based on higher oil prices in 2010. As such, these assets will continue to provide an important safety cushion in the event of adverse oil price developments or external financing difficulties.
Public domestic debt
Public domestic debt was reduced to SR225 billion, but relative to GDP it has increased to 16 percent in 2009 from 13.5 percent in 2008. This is merely a statistical illusion due to the contraction in nominal GDP. Despite this, it appears that the government has refrained from drastically reducing debt, given that it has already incurred a fiscal deficit this year. While the government has more than enough reserves to pay off its entire debt, the opportunity cost of doing so is considered to be high. In other words, the cost of servicing debt now would be small compared to returns from using its foreign assets to diversify investments abroad or finance expenditure plans at home.
Fiscal policy stance
Given the uncertainty regarding the pace of global recovery, continued spending in 2010 is not only necessary but also feasible for the Saudi government. With a low domestic debt-to-GDP ratio and currently low interest rates, there is plenty of room to resume an expansionary fiscal policy in 2010. Moreover, the anticipated increase in oil prices and still robust NFA position means that the government can increase spending and compensate for any unexpected loss of foreign funding. Nevertheless, sustainable recovery will depend not only on the amount of spending, but also on its quality. That is why the budget will continue to emphasize both physical and human capital expenditure. In addition, the government will continue to allocate funds to specialized credit institutions to support private investment and consumption.
Oil price target
Although the budget does not provide oil assumptions, NCB estimates that is based on an average price of about $43-$45 a barrel for Arab Light and an average production level of around 8.3 million bpd. While still considered to be a rather conservative assumption, it is slightly higher than the average over the past five years, which is probably a reflection of the government’s implicit policy to finance higher expenditure plans ahead. Revenues are projected at SR470 billion compared with actual SR505 billion earned in 2009. Total expenditures are budgeted at SR540 billion, an increase of 14 percent as compared with the budget for 2009. This would lead to a deficit of around SR70 billion, which is rather pessimistic compared to the actual SR45 billion deficit in 2009, when oil revenues took a sharp downturn at the height of the global economic crisis.
Capital expenditure
Out of SR540 billion, around SR260 billion or 48 percent has been allocated for capital expenditure in the 2010. This is around 16 percent higher than the 2009 budget. As well as continuing to allocate re- sources to infrastructure, the budget prioritizes spending in social sectors, namely education and health.
Meanwhile, current expenditure will continue to focus on improving the distribution of wealth among the population via wages and subsidies to low-income groups. As part of its indirect fiscal stimulus strategy, the government will continue to allocate funds to specialized credit institutions.
According to the announcement, around SR48 billion in 2010 compared to SR40 billion in 2009 will be disbursed by specialized credit institutions to finance major industrial projects and to support social and human development. In this way, the government will be able to provide the much needed stimulus to the private sector to finance investment expenditure plans, given tight domestic credit conditions, the NCB report said.
Funds to alleviate poverty
Meanwhile, funds allocated to alleviate poverty and raise living standards will likely enhance private consumption expenditure in an environment of slowing wage growth and high unemployment. This will certainly have positive implications for overall economic growth. In addition, the increase in capital via credit institutions implies higher government savings in the budget over the long-run.
According to NCB, oil prices to average $75 a barrel in 2010. Oil prices are now trading within the $65-$75 a barrel range, which is significantly higher than the $39 a barrel low back in February.
However, oil specific fundamentals like soaring inventories will likely put downward pressure on oil prices, especially if the global recovery hits a soft patch in 2010.
The overall fiscal surplus will rise to 7.6 percent of GDP (or SR121 billion) in 2010, based on higher oil revenues. The NCB report said our forecast is based on an average Arab light price of $75 a barrel. This will result in oil revenue of SR634 billion, around 40 percent higher than actual levels in 2009, which also takes into account a 2 percent growth in export volumes. Non-oil revenues are also projected to increase to SR87 billion in 2010. Actual expenditures will most likely exceed budgeted expenditures, by around 11 percent to reach SR601 billion.
Inflationary pressures
Emerging signs of inflationary pressures imply that real growth in the budget will be slightly lower than headline figures. In 2009 YTD, the Saudi riyal depreciated 2.5 percent and 9.5 percent vis-à-vis the euro and sterling pound, respectively, mirroring the US dollar weakness against both currencies. The NCB said in its report that global commodity prices will continue to rise in 2010 and the US dollar may very possibly resume its weakness versus anchor currencies.
The 2010 budget is highly expansionary in nominal and real terms, but even more so if the impact of the indirect fiscal stimulus to private investment and consumption via specialized credit institutions is taken into account. This falls in line with the government’s commitment to support economic recovery in 2010.
