Saudi keeps debt despite surge in assets

Saudi Arabia has slashed its public debt to its lowest level in nearly two decades but is keeping part of the debt although its foreign assets have swelled to a record high because of strong oil prices, analysts said.

After exceeding the Gulf Kingdom’s GDP in late 1990s, the debt stood at just 6.3 per cent of GDP at the end of 2011, recording a rapid slide in the previous six years due to massive fiscal surpluses, official data showed.

The debt stood at around SR167 billion at the end of 2010 before it was cut further to SSR136 billion at the end of 2011.

Forecasts by the Riyadh-based Jadwa Investments, a key financial firm in the world’s oil superpower, showed the debt could be trimmed to SR115 billion at the end of 2012 and SR100 billion at the end of 2013.

Experts said Riyadh has sufficient financial surpluses to wipe out the debt altogether following a sharp rise in its foreign assets over the past few years to reach a record high of around SR2,239 billion at the end of May.

But they added that Saudi Arabia, which controls over 15 per cent of the world’s recoverable oil deposits, is intentionally keeping part of the debt as a monetary tool aimed at absorbing any excess liquidity in the domestic market.

“Some of the debt is used for monetary policy purposes. Banks like government debt as it is a very safe investment, so when there is a lot of liquidity in the banking sector, more debt will be issued, which banks will buy, thereby absorbing the liquidity and prevent it from feeding into inflation,” said Paul Gamble, chief economist and head of research at Jadwa.

“For example, when the bonuses for public-sector workers were awarded last year, the government increased debt issuance to absorb liquidity. Having some debt is therefore helpful to the economy. It is also important to realize that much of the outstanding debt is owned by other government agencies (such as the pension funds), so it doesn’t pose a problem for the government,” he said in comments sent to Emirates 24/7.

Saudi Arabia has used strong oil prices over the past 10 years to tackle its festering public debt caused by massive fiscal deficits due to weak crude prices, low oil production by the Kingdom and high public spending during the 1990s. 

Official data showed the sovereign debt climbed to its highest ever level of SR689 billion at the end of 1999 before plunging to nearly SR660 billion at the end of 2002. It remained almost unchanged by the end of 2003 before it began its rapid decline in the following years to reach SR614 billion at the end of 2004. 

At the end of 2005, the debt plummeted to SR475 billion and continued its plunge to reach about SR267 billion at the end of 2007, nearly 18.7 per cent of Saudi Arabia’s nominal GDP of SR1.430 billion.

The debt was sharply cut in 2008 after Saudi Arabia recorded its highest budget surplus due to a surge in average oil prides to an average of $95 a barrel.

Jadwa’s forecasts showed strong oil prices would boost Saudi Arabia’s foreign assets to nearly 2,756 billion at the end of 2012 while actual revenue could climb to one of its highest levels of SR1,090 billion, creating a fiscal surplus of about SR333 billion, the second highest after the 2008 record balance. 

Jadwa expected the prices of Saudi crude to average around $100 a barrel this year compared with $106 in 2011 but projected an increase in the Kingdom’s crude output to 9.6 million bpd from 9.3 million bpd.

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