While 2011 targets rank among largest stimulus measures in the G20 relative to GDP, the measured pace of budget expansion is part and parcel of an effort to achieve greater efficiency. Despite continued high spending, the government managed to trim down domestic debt by a substantial 26 percent in 2010, giving it a unique edge among its G20 counterparts.
Budget commitments for 2011 represent the largest allocation in history and emphasize infrastructure and social spending. Allotments to education and training, health and social development, and infrastructure - together 46 percent of the budget - grew 8 percent, 12.3 percent, and 10.4 percent, respectively. This underpins the state's plan to continue building the infrastructure necessary to support a population growing more than 2 percent per year and diversify away from its reliance on oil.
The 2011 budget foresees a deficit of SR40 billion on revenues of SR540 billion - the third year in a row the government has projected a deficit. This suggests the government is using a conservative oil price assumption of about $58 per barrel of WTI on production of 8.7 million barrels per day (bpd) to determine its budget, according to our estimates. Higher actual oil prices enabled Saudi Arabia to post a substantial surplus in 2010 of SR108.5 billion after recording its first deficit for seven years in 2009.
The budget includes a provision of SR256 billion for financing new and ongoing projects. Unlike current expenditures comprising recurrent costs on items only used once such as salaries, this category describes capital expenditures - funds directed at assets with potential long-lasting benefits for the economy. The government, for instance, has pledged to build 610 new schools and lay down 6,600 kms of road.
While the state's aim is for capital spending to account for almost 45 percent of total spending, actual results have been lower. In 2009, capital spending accounted for 30.2 percent of total spending, vastly higher than 10 percent in 2000 but still below the desired level. On the other hand, current expenditures have almost doubled since 2000 and comprise the biggest portion of overspending. Policymakers will need to strike the right balance between current and capital spending in the coming years.
The 2011 budget demonstrates that the Kingdom is dedicated to continuing stimulatory spending to develop the economy and persuade private investors to do the same as they gradually emerge from a phase of deleveraging. A slowdown in the pace of budget growth, however, also signals the state's goal to rein in overspending which reached 25.5 percent in 2009 and 16 percent in 2010.
When the government put together its 2010 budget it anticipated a deficit of SR70 billion, which would have been slightly narrower than the 2009 deficit amounting to SR86.6 billion. Preliminary data show the Kingdom was able to achieve a surplus of SR108.5 billion, linked to a good rebound in oil prices for most of the year as well as a likely decline in capital investments by Saudi Aramco this year. In the first 11 months of 2010, oil prices averaged almost $79 a barrel - up from $62 a barrel in 2009. As a result of greater revenues from oil exports, the government exceeded its revenue target of SR470 billion for the year - generating revenue of SR735 billion in 2010.
The surplus was as a result more than double our forecast of SR41.3 billion. The government, meanwhile, failed to substantially minimize the pace of overspending. Government expenditure of SR626.5 billion in 2010 was against a budget target of SR540 billion - indicating overspending of 16 percent, which could be revised higher in 2011 as happened this year.
The Kingdom continued to service public debt in 2010, reducing overall public debt to SR167 billion from SR225.1 billion in 2009. That is a drastic reduction, almost 22 percent more than we were anticipating, and is a testament to the Kingdom's fiscal health. Public debt now represents 10.2 percent of GDP, down from 103 percent in 1999. All Saudi government debt is domestic, held mainly by the two state pension funds - the General Organization for Social Insurance and the Public Pension Agency - with the balance at banks. As many G20 economies grapple with rising debt-to-GDP ratios, the Kingdom has been nearly unique in the global context by the fact that debt ratios are falling even as the government poured funds into the economy to keep it in motion amid global recession.
Reducing the debt burden has been possible due to the generous store of foreign assets held by the Saudi Arabian Monetary Agency (SAMA), which stood at SR1.61 trillion ($434.7 billion) at the end of October. SAMA added SR90 billion to its foreign assets store during the first 10 months of 2010. For the corresponding period in 2009, it had drawn down foreign assets by SR183.2 billion so the government could meet budget commitments amid a weaker oil price backdrop.
The budget statement included preliminary macroeconomic data for 2010 which are likely to be revised during 2011. While the private sector remains cautious about committing to new investments, private sector real GDP growth rose to 3.7 percent, below our 4 percent forecast, and compared with 3.5 percent in 2009. Overall real GDP growth of 3.8 percent was on par with our forecast, although it is subject to revision. This year, Saudi Arabia raised its real GDP growth estimate for 2009 to 0.6 percent from a preliminary 0.15 percent.
The government sector picked up the greatest slack in real GDP growth estimates, growing 5.9 percent according to preliminary estimates, well above our 4.6 percent forecast and the fastest pace of growth since 1997 (6.1 percent). Among key nonoil sectors, the electricity, gas and water sector witnessed the fastest expansion at 6 percent, followed by the transport and communications sector at 5.6 percent. Retail, restaurants and hotels GDP grew 4.4 percent while the construction sector expanded 3.7 percent. Finance sector growth was more muted at 1.4 percent. The private sector contributed 47.8 percent to real GDP in 2010, below its 2009 contribution of 47.98 percent.
At current prices, GDP climbed substantially this year to SR1.63 trillion from SR1.41 trillion last year as a result of the higher oil price environment. The Saudi economy accounts for almost 45 percent of the total Gulf area and more than 25 percent for the MENA region.
According to Banque Saudi Fransi's view, economic growth should accelerate to 4.2 percent at constant prices in 2011. The private sector's rate of growth next year is likely to climb to 4.6 percent, while government GDP expansion falls to 3.8 percent.
The current account balance made an impressive comeback this year, more than tripling to SR260.9 billion, against our forecast of SR154.15 billion. The increase is linked to stronger oil revenues resulting from the higher price environment. Meanwhile, the pace of increase in imports was not as quick as earlier expected. Oil revenues rose to SR762.1 billion, up 24.6 percent, while nonoil revenues climbed 13.7 percent to SR124.2 billion. Preliminary data show imports rose just 0.7 percent to SR326.2 billion. In keeping with the cautious recovery, the bank anticipates imports will rise to SR374.2 billion in 2011, or 9.7 percent of GDP, while oil export revenues should hit SR209.5 billion.
With the record budget, Saudi Arabia is sending a signal to the market that it will continue to back its aggressive expansion plans with impressive financial muscle.
The 2011 budget includes sizeable increments in all key policy areas while gesturing public sector departments to scale back excess spending in a bid to curtail current expenditures to reasonable levels. Placing continued emphasis on infrastructure and social spending, the budget complies with the state's $385 billion five-year plan, which will be carried through in it entirety.
- John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.
