Saudi debt to fall in 2011: Moody’s

Higher oil prices and production will likely boost Saudi Arabia’s foreign assets at the end of 2011 and this will allow it to cut its public debt to around eight per cent of GDP, according to Moody’s investor service.

Besides cutting debt, the world’s dominant oil power will also be able to record a fiscal surplus for the second year running despite higher spending, it said.

The surge in spending will boost real GDP growth by nearly 6.5 per cent while inflation could climb to one of its highest levels of six per cent.

“Despite the massive spending programme, Saudi Arabia expects to maintain a budget surplus for 2011 and 2012, owing to government revenues supported by high oil prices and an increase in oil production,” Moody’s said in a study.

“Although the economy has a limited diversification beyond the hydrocarbons sector and a high volatility in real and nominal output, large financial reserves will enable the government to sustain growth in the non-oil private sector through capital spending during our outlook period, independent of oil price fluctuations…..we expect net foreign assets to reach 95 per cent of GDP as of year-end 2011, with debt levels dropping to around eight per cent of GDP.”

Saudi Arabia’s public debt stood at around SR167 billion ($44.5bn), nearly 8.2 per cent of GDP at the end of 2010.

The debt dived by nearly SR58bn from 2009 to 2010 when the kingdom recorded a fiscal surplus of around SR109bn.It was also cut by just SR12bn through 2009 although the budget suffered from a deficit of SR87bn.

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 SR689bn at the end of 1999 before plunging to nearly SR660bn at the end of 2002. It remained almost unchanged by the end of 2003 before it began its rapid slide in the following years to reach SR614bn at the end of 2004.

At the end of 2005, the debt plummeted to about SR475bn and continued its decline to reach around SR267bn at the end of 2007, nearly 18.7 per cent of Saudi Arabia’s nominal GDP of SR1.430bn.

The debt was sharply cut in 2008 after Saudi Arabia recorded its highest ever budget surplus of SR590bn as a result of a surge in average oil prides to an all time high of around $95 a barrel. The decline depressed the ratio of the debt to the GDP from more than 100 per cent to 65 per cent in 2004 and only 13.4 per cent at the end of 2008. But it climbed again to around 16.1 per cent in 2009 due to a sharp drop in GDP because of lower crude prices and output.

High oil prices allied with a surge in Saudi Arabia’s crude output close to 10 million barrels per day to make up for crude disruption from conflict-hit Libya to push the country’s foreign assets above SR2,000 billion at the end of September for the first time in its history before they slipped to nearly SR1,093bn at the end of October.

Moody’s said higher production and public spending would boost Saudi Arabia’s real GDP growth by around 6.5 per cent in 2011 before dropping to three per cent in 2012, driven by declines in both prices and production.

“We expect inflation to increase to around six per cent by year end 2011, from 5.3 per cent in September 2011, before subsiding to around 4.5 per cent in 2012….the risk of higher inflation remains a primary macroeconomic challenge in Saudi Arabia, particularly given the huge spending packages announced and the lack of monetary policy tools available to contain inflationary pressures,” Moody’s said.

It said key policy options for the authorities to tackle higher inflation include slowing the pace of government spending or lowering the bank’s loan-to-deposit ratio, both of which will affect the business and credit conditions for banks.

The report said that despite resilience to short-term oil price fluctuations, the rise in current expenditures, steadily falling oil prices, and lower Saudi oil output, leaves the Kingdom vulnerable to a sustained longer-term decline in oil prices.

It noted that during 2010, Saudi Arabia required a fiscal breakeven oil price of around $75/ barrel compared with $65/barrel in 2009, which is higher than other Gulf Cooperation Council (GCC) countries. “We estimate that the breakeven has increased to $80/barrel in 2011.”

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