Saudi can deal with fresh financial shocks

Kingdom to record large fiscal surplus in 2012 as assets surge and debt shrinks

Saudi Arabia has accumulated enough foreign assets to deal with fresh financial stocks resulting from future global economic turbulences and its fiscal position is set to improve further this year.

Forecasts by the Gulf Kingdom’s largest bank showed it would again overshoot budgeted spending this year but the surplus could exceed the 2011 balance due to an expected surge in oil export earnings.

National Commercial Bank (NCB) said it believes Saudi Arabia, the largest Arab economy and world’s top oil exporter, is well positioned to maintain financial stability due to robust finances that “boded well for its credit rating, in contrast to the flurry of downgrades suffered by the developed economies.”

It noted that in Fitch rating agency affirmed the Kingdom’s long-term rating in April at an investment grade AA- with a stable outlook. It also maintained the short-term foreign currency issuer default rating at F1+.

In a study sent to Emirates 24/7, NCB said Fitch’s move was prompted by strong Saudi government finances, which have largely withstood oil price volatility and the global economic crisis.

“As mentioned earlier, the substantial increase in net foreign assets, largely in relatively less risky and liquid instruments is a clear indication of the government’s commitment to fiscal rectitude, which provides crucial reassurance to investors,” the study said.

“These factors demonstrate Saudi Arabia’s ability to contain shocks emanating from the global crisis and it is this resilience which supports the Kingdom’s positive economic outlook.”

Citing government data, the report showed public domestic debt was reduced further from SR167 billion at the end of 2010 to SR135.5 billion at the end of 2011, amounting to 6.3 per cent of GDP.

It expected the debt to be trimmed below SR100 billion this year given the continued settlement of maturing Saudi Development Government Bonds.

NCB said it expected oil prices to remain supportive of the fiscal balance, expected to register a surplus to GDP ratio of 14.3 per cent this year.

Even though the government’s 2012 budget does not provide oil price and production level assumptions, “we believe that both revenues and expenditures are understated.”

The Ministry of Finance estimates revenues and expenditures at SR702 billion and SR690 billion, respectively, projecting a surplus of only SR12 billion. Based on announced revenues, the government seems to have assumed an average oil price of $60/bbl for this year, NCB said.

“With our forecast of $105/bbl for the average Arabian light spot prices and a 9.4 million barrels per day for average oil production we project a budget surplus of SR317 billion, or 14.3 per cent of estimated GDP in 2012,” it said.

“This is largely due to elevated revenues, expected at around SR1088 billion this year, with hydrocarbon export earnings registering SR1006 billion, the second highest on record, and non-oil revenues forecast at SR82 billion, which is 5.5 per cent above actual level in 2011.”

On the expenditure side, the government will most likely exceed budgeted expenditures by 12 per cent to reach SR772 billion, the report showed.

It said the “fading-out” of one time transfers would reduce current expenditures by 6.7 per cent to SR540 billion.

“Yet the permanent fiscal measures that will amount to more than SR50 billion will increase the base from now onwards, thus, raising questions about fiscal sustainability, particularly, if oil prices fall below the break-even oil prices for a prolonged period, an unlikely but still probable scenario,” it said.

“Based on historical evidence, actual capital expenditures will end up well below the budgeted figure of SR265 billion… therefore, we project SR232 billion in 2012. Against this backdrop of elevated revenues and marginally lower projected expenditures, the break-even oil price required to balance the budget will fall from $70.4/bbl last year to $66/bbl this year.”

The report also expected high oil prices and output to create a large current account surplus in 2012 for the second year running, projecting it at 31.3 per cent of GDP. It forecast the oil income to swell by 11 pert cent to a record high level of around $335.9 billion while non-oil exports are also expected to rise by nearly 12 per cent to $45.8 billion.

“Accordingly, this will propel the petrochemical sector’s profitability for another year, after net income for the listed companies increased by 38 per cent Y/Y from SR29.6 billion to SR40.8 billion in 2011,2 NCB said.

“Looking ahead, the recent cancellations of anti-dumping duties on Saudi petrochemical exports by many countries, such as Turkey and India in January and March will bode well for the sector that, currently, represents 33 per cent of the total non-oil exports. There is a downside risk to our projection that can arise from further deterioration in regional growth.”

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