Saudi to have surplus despite spending surge

Saudi Arabia’s budgeted fiscal deficit for 2011 will still turn into a surplus at the end of the year despite a sharp rise in spending following two massive financial benefits announced by the King, according to a Saudi investment firm.

The economy of the world’s oil superpower is also expected to surge above five per cent this year, the highest since 2005, due to the Gulf Kingdom’s decision to increase oil output to offset supply disruption in conflict-battered OPEC member Libya, Jadwa Investments said in a study sent to Emirates 24|7.

The Riyadh-based company put total excess public spending involved in King Abdullah’s two financial packages for citizens at SR500 billion ($133 billion).

But it noted that not all those funds would be spent this year, adding that the

largest component of new spending is SR250 billion for public housing, which is “certain” to be spread of a number of years.

“Nonetheless, there will be a substantial increase in government spending in 2011 and expenditure over the medium term will be greater than we had previously anticipated…....however, with both oil prices and oil production also set to be well above our earlier forecast, we think that there will still be a budget surplus in 2011 and 2012,” the study said.

It expected government spending to fall in 2012 as the two month’s salary, funding for the Real Estate Development Fund, Saudi Credit Bank and General Housing Authority and additional allocation to the Ministry of Health are assumed to be one-time items, as are many of the smaller components of the package.

“For others it will be difficult to remove. For example, we have not adjusted our forecasts to take account of the permanence of the 15 pay adjustment for public sector employees, as we did not foresee this being withdrawn,” the report said.

“Higher oil revenues will be sufficient to ensure that the budget stays in surplus in 2011 and 2012 despite the large additional spending.”

The report projected the surplus to be around 2.8 per cent of GDP this year and 1.7 per cent of GDP in 2012.  It estimated that it would require an oil price of $77 for Saudi export crude to balance the budget this year.

For 2012, the breakeven oil price falls to an average $73 per barrel, the study said, adding that unless the Saudi government takes measures to reduce expenditure, then in the absence of an ongoing increase in production, the breakeven price will rise in subsequent years.

“The government’s vast stock of foreign assets, which were at an all-time high of $445 billion at the end of January, means that it should be able finance any budget deficits for many years to come.”

Jadwa’s data table on Saudi Arabia, which controls over a fifth of the world’s proven oil deposits, showed the actual fiscal surplus would be around SR53 billion in 2011 and SR32 billion in 2012. The level remains far below the 2010 surplus of SR109 billion but in contrast with the SR87 billion gap in 2009.

“As for the economy, growth is now forecast to hit 5.6 per cent this year, the highest since 2005. This is primarily because of higher oil production…the Kingdom has increased its crude output to compensate for the disruption to Libyan production,” Jadwa said.

“We have also raised our projection for non-oil private sector growth, as spending contained in the two royal decrees will be sufficient to offset a weaker regional economy and reduced foreign investor appetite.”

The report, assuming regional tension will ease, expected the Kingdom’s oil production to fall in 2012. “So despite the continuing impact of the government housing programme, we forecast that real GDP growth will slow to 3.4 percent.”

Jadwa said it had raised its forecast for non-oil private sector growth in Saudi Arabia on the grounds excess spending will offset weakness in the regional economy and reduced foreign investor appetite.

“The beneficiaries of the new government policies are concentrated in a few areas, primarily construction and retail… other companies will find conditions tougher.  Recent events have caused adjustments to our non-oil growth forecasts to take account of the following factors,” the report said.

It listed the following factors:

--Huge new construction spending: In the royal decrees the government committed itself to spend SR250 billion on building 500,000 new houses over an unstated period. This will stimulate strong growth in the construction sector and related industries (such as suppliers of construction materials machinery and utilities) and services (architects, plumbers, etcetera).

Increasing both the capital of the Real Estate Development Fund and the maximum amount it can lend will also broaden home ownership. This generates important economic gains, both in the short-term (the purchase of furniture and fixtures) and the long-term (the ownership of an asset that accumulates value and can be used as collateral).

--Greater consumer spending: A bonus for all government employees and probably many private sector employees, and higher welfare payments are expected to result in a jump in consumer spending.

The largest proportionate gains from the government’s spending packages will be enjoyed by those on low incomes, who tend to spend a greater share of their income than those on higher incomes. The retail sector will be the clear beneficiary of the rise in consumers’ expenditure. The trickle down beyond this will depend on the goods that are in demand. It is highly likely that the bulk of spending will go on imported goods.

--Weaker regional economic environment: The economies of all countries in the region are being affected by the unrest, even if they are not facing any protests, owing to greater uncertainty hitting investor and corporate confidence.

For those countries that experience political change or major protests, the economic effects will be large and long lasting.

This will clearly impact local companies with operations in those countries. Weaker economic growth in the region will also reduce demand for Saudi exports; the Middle East and North Africa was the destination for 57 percent of the Kingdom’s non-oil exports in 2009 (or 42 per cent excluding re-exports).

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