Saudi fiscal gap to turn into surplus

Saudi Arabia will again bask in a massive fiscal surplus in 2011 although it has forecast a deficit that is based on conservative oil price and record high expenditure, two key financial institutions in the Gulf Kingdom have said.

Oil prices could end the year nearly 40 per cent higher than the projected level and crude output by the world’s oil superpower could increase by at least 100,000 barrels per day, they said in separate studies.

One study projected the 2011 budget deficit of SR40 billion to turn into an actual surplus of SR77 billion while the second scenario put it at over SR100 billion.

Saudi Arabia, which controls over a fifth of the world’s recoverable oil deposits, on Monday approved the highest budget in its history, estimating spending at SR580 billion and revenue, mostly from crude sales, at SR540 billion, leaving a deficit of SR40 billion, far lower than the SR70 billion assumed in 2010.

“However, we believe that revenues are underestimated, and the government will still manage to record a surplus in 2011. With our forecast of $80 for the average Arabian light spot prices and an 8.5 million bpd for average oil production in 2011, we project revenues and expenditures at SR753 billion and SR677 billion, respectively. This would lead in turn to a budget surplus of SR77 billion, or 4.2 per cent of estimated GDP in 2011,” said the first study by National Commercial Bank (NCB), the largest bank in Saudi Arabia.

The study, sent to Emirates 24/7, expected actual expenditure to be overshot by around 17 per cent in 2011 as the government is pursuing post-crisis fiscal expansionary measures, which are aimed at supporting the economy.

“The government's expansionary fiscal policy remains in place reflecting its commitment to support the economy and enhance physical and social infrastructure,” NCB said in its 10-page study about the 2011 budget, which is based on a WTO oil price of 58-60 a barrel.

Another study projected the Kingdom’s actual oil production in 2011 to be around 8.3 million bpd, nearly 100,000 above the 2011 average.

The study by the Riyadh-based Jadwa Investments said it believed the Saudi government based the 2011 budget on a WTO price of $60 or $56 for Arabian crude, adding that the level is consistent with the oil revenue projection.

“We believe that this is a conservative assumption and based on our forecast that Saudi oil will average $78 during 2011 and that government spending will be above the budgeted level, we forecast a budget surplus for 2011,” it said.

“It is normal for the budget to be based on a conservative oil price assumption. Over the last decade the actual oil price has averaged over 60 per cent higher than the one used for the budget (for 2010, it is likely to be around 55 per cent higher). The last year actual oil prices averaged below the budgeted level was 1998…… WTI is currently trading at $88 per barrel, 47 per cent above the level we estimate is used for the budget.”

According to the report, despite the very high and rising level of government foreign assets, investment income will probably be little changed from the past few years owing to the ongoing low interest rates on US government bonds, which are believed to constitute the bulk of Saudi government foreign assets.

“We forecast a budget surplus of SR106 billion in 2011. This is because we expect the oil price to be higher than that used in the budget and therefore that oil revenues will exceed the budgeted total,” Jadwa said.

“We forecast total oil revenues to the budget at SR674 billion and non-oil revenues at SR90 billion.  Spending will be above the budgeted level.”

The report noted that over the last ten years actual government spending has averaged 21 per cent higher than the budgeted amount.

“The fiscal policy stance remains highly expansionary in the 2011 budget in both nominal and real terms. The impact of the fiscal stimulus will be even higher if we take in account funds allocated to specialized credit institutions,” it said.

“This reflects the government's commitment to expand the economic capacity and to enhance physical and social infrastructure to meet the burgeoning demand and employment needs by a youthful population. The robust fiscal and external positions and the elevated oil prices will allow the government to simultaneously sustain its capital spending plans and amass foreign reserves.”

Higher than budgeted oil prices in 2010 turned Saudi Arabia’s fiscal deficit into a surplus of around SR109 billion, according to the Ministry of Finance.

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