Saudi debt helps money supply management

Saudi Arabia slashed its public debt by nearly 25 per cent through 2010 although it has sufficient overseas financial resources to completely eliminate the debt, according to the Gulf Kingdom’s largest bank.

The debt was cut from around SR225 billion at the end of 2009 to SR167 billion towards the end of 2010 after the world’s dominant oil power basked in a massive budget surplus because of a surge in crude export earnings, National Commercial Bank (NCB) said in a study sent to Emirates 24/7.

Although it was one of the biggest cuts in the debt over the past few years, Saudi Arabia appears to have intentionally kept part of the debt as a key money supply tool and a benchmark for pricing private corporate bonds, it said.

The study said the cut that followed gradual reductions of the debt over the past decade because of strong oil prices, depressed its ratio to the projected 2010 GDP to only around 10.2 per cent, its lowest level in nearly 15 years.

“Even though the government has more than enough reserves to pay off the entire debt, it opted out from such direction, especially that the cost of servicing the debt is currently low,” the study said.

“We do still believe that the Saudi government, justifiably, prefers rather to spend this money to finance expenditure plans at home or to diversify investments abroad. Evidently, it is important to keep a level of sovereign debt as a monetary tool to manage money supply and as a benchmark for pricing corporate bonds and sukuk (Islamic bonds),” the 10-page study added.

NCB noted that the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, undertook a “proactive” strategy and increased the issuance of treasury bills by SR21.4 billion in 2010 to replace matured government bonds, which amounted to SR12.5 billion, to avoid a surge in liquidity.

Citing official data, the report showed strong crude prices, which averaged around $76.4 a barrel for Arabian light, allied with an increase of around 200,000 bpd in Saudi Arabia’s oil output to sharply boost its revenue during 2010.

It showed total revenue stood at around SR735 billion, nearly 56 per cent above budget estimates. They included nearly SR669 billion in oil export earnings.

“The overall budget balance turned into a surplus driven by oil price recovery. The rally in oil prices coupled with a mere increase in oil production brought revenues up by 44.2 per cent over 2009, turning the fiscal balance into a surplus of SR108.5 billion, nearly 6.7 per cent of GDP compared to a deficit of SR87 billion or -6.1 per cent of GDP in 2009,” the report said.

It noted that expenditures hit a new record this year as the Saudi government continued its commitment to increasing economic capacity through spending on social and physical infrastructure projects.

Saudi Arabia, which controls over 20 per cent of the world’s proven crude resources, 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 slide 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 ever budget surplus of SR590 billion 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 16.3 per cent in 2009 due to a sharp drop in GDP because of lower crude prices and output.In a recent study, the Riyadh-based Jadwa Investments said Saudi Arabia had sufficient financial resources to wipe out the public debt in 2008 but that it had been reluctant to do so within a drive to tackle inflation.

"The government has enough reserves to pay off its entire debt, yet it continues to use more of the surplus to build up these reserves than to cut debt," it said.

"Many people assume that debt is bad and that it should be eliminated......... it is certainly the case that too much debt is a bad thing and the debt situation in the late 1990s was a concern. However, there are a number of good reasons why the government needs some debt and why repaying it all would have a negative impact on the economy, particularly in fuelling inflation."

Official figures showed Saudi Arabia’s foreign assets surged by nearly SR21 billion in October to record their largest increase through 2010 as oil prices were at one of their highest levels in more than a year.

From around SR1,642.2 billion at the end of September, the foreign assets controlled by SAMA swelled to nearly SR1,663.1 billion at the end of October, their highest level since the start of 2009, SAMA said.

It was the largest increase in SAMA’s assets for far this year and it indicated that the country has earned more than it spent, which explains the fact the forecast budget deficit of SR70 billion turned into a large actual surplus.

Follow Emirates 24|7 on Google News.