Spending appears to have been broadly on track in 2011 and growth was strong, led by the private sector as per preliminary estimates. While the higher budgeted expenditure appropriations broadly reflect the permanent nature of the current expenditure part of the Arab-unrest related stimulus, the focus next year will be on achieving a better quality of spending. This will occur as housing appropriations and capital injections to specialized lending institutions (made available in 2011) increasingly filter into the economy. Also, this would most likely entail an increase in credit disintermediation, as recognized in the budget, but a robust nonoil economy is likely to support continued broader banking sector loan growth, the report said.
The preliminary outturns for macro indicators for the past year, usually announced by the MoF along with the annual budget announcements, show growth was strong as a buoyant private sector expansion was underpinned by the government stimulus. GDP growth is estimated to have reached 6.8 percent in 2011, in line with expectations. The decomposition of growth, however, is better than expected with much stronger growth from the nonoil sector than projected. The non-hydrocarbon sector grew by 7.8 percent in 2011 vs BofA ML forecast of 4.9 percent. To put into perspective, the reported nonoil sector growth is the highest in the last three decades. Also, unlike the 2009 stimulus where the nonoil government sector expanded by 5.2 percent to cushion the downturn amid weak private sector, private sector growth was buoyant and broad based.
Note that the oil sector is, however, reported to have expanded by just 4.3 percent in 2011. Also, SAMA (Saudi Arabian Monetary Agency) reports imports grew by just 2 percent, though this understates the strength of domestic demand and appears lower than implied by H1, 2011 figures. As such, BofA ML believes that GDP growth and, most importantly, its decomposition could be revised going forward (toward a higher contribution from the oil sector).
The MoF reports the preliminary fiscal balance was SR306 billion (14.1 percent of GDP), vs projections of SR165 billion (7.7 percent of GDP). The difference stems mainly from higher revenues (SR1.11 trillion vs SR989 billion anticipated) as expenditures were broadly in line with expectations (SR804 billion vs SR824 billion projected). Nonoil revenues were SR77.7 billion) but oil revenues were higher than expected, due to higher than projected oil prices and production. Stimulus spending appears to have been on track, comfortably financed by high oil prices and production. The decision to allocate SR250 billion from this year's fiscal surplus into a dedicated account at SAMA to finance the construction of 500,000 residential units could help expedite the process and put the onus on execution of the capital spending appropriations. This also treats the transfer as an off-budgetary item in the budget presentations, conveniently bringing down the fiscal breakeven oil price by $27 per barrel.
The 2012 budgeted expenditure is the largest on record (19 percent increase over 2011 budget) but is, as expected, below preliminary actual 2011 spending. Budgeted revenues are also the largest on record.
“We believe this reflects both more realistic and more prudent budgeting this year. This also fits with the fact that budgeted capital expenditures are at similar levels to 2010 and 2011 budgets,” BofA ML said.
The increase in appropriations thus likely reflects higher current spending, in line with the continuing impact of the permanent portions of the Arab unrest-related stimulus.
Fiscal revenues are budgeted at SR702 billion, expenditures at SR690 billion, meaning a surplus of SR12 billion is actually being budgeted in contrary to the past few years. Capital expenditures are budgeted at SR265 billion while current spending is budgeted at SR425 billion (61 percent of total, though the usual pattern of overspending on current and underspending on capex generally brings current spending to stand at 75-80 percent of spending). Disclosed decomposition of spending shows appropriations for education are the largest at 24 percent of total (includes construction of 742 new schools), followed by health and social affairs (13 percent of total, includes construction of 17 new hospitals).
As is customary, the budgeted oil production and price were not disclosed.
According to BofA ML, a budgeted oil price of 70 a barrel is consistent with the 2012 budget revenue projections, leading the disclosed budget to breakeven at $68.6 a barrel.
BofA ML said: “We still expect the fiscal stance to remain supportive of growth next year. We expect total actual expenditures to amount to SR750 billion in 2012. This would represent 9 percent overspending and would be 6.7 percent lower than realized 2011 spending as one-off items from stimulus packages wane. Our revenue and spending projections are consistent with a fiscal breakeven oil price of $78.5 a barrel in 2012. We expect GDP growth of 3.3 percent in 2012 on higher base effect and drag from oil sector. We see a fiscal surplus of 8.6 percent of GDP, based on oil production of 9.3mn bpd and oil in $100 a barrel handle.”
The better quality of spending will not be necessarily visible in the fiscal accounts in 2012 but the appropriations of SR70 billion to the Saudi Real Estate Development Fund and Saudi Credit and Savings Bank that were part of the 2011 fiscal stimulus package will be increasingly spent and filter into the broader economy.
As a result, disintermediation is likely to continue taking place in 2012 as the 2012 budget expects an aggressive SR86 billion to be lent by Saudi specialized credit institutions (10 percent of banking sector outstanding loans; 4 percent of GDP).
This compares to SR47 billion expected to be lent in the 2011 budget vs. an implied SR25.7 billion possibly actually lent in 2011. For comparison, the peak gross amount lent by specialized credit institutions was SR33 billion in 2009 while their outstanding loan book was equal to 25 percent of that of the banking sector in 2010. Though unlikely to be disbursed in its entirety near-term, the specialized lending programs and housing appropriations highlight that the government is intent on carrying to stimulate the nonoil economy and support job creation, the BofA ML report said.
