Saudi seen reluctant to cut debt further

The government has more than enough reserves to pay off its entire debt, says NCB

Saudi Arabia is expected to freeze measures to further reduce its public debt although its foreign assets are more than enough to eliminate the entire debt owed mostly to local banks, a key Saudi bank has said.

The surge in those assets over the past few years because of strong crude prices has allowed the world’s oil powerhouse to emerge from the 2008 global financial distress unscathed and even stronger, National Commercial Bank (NCB) said in a study sent to Emirates 24/7.

The Gulf Kingdom’s strong financial position was reflected in a decision in February by Moody’s Investors Service to raise the country’s rating by one level from A1 with a stable outlook, to Aa3, the fourth highest grade, it said.

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

“Public domestic debt was reduced to SR225 billion, but relative to GDP it increased to 16 per cent in 2009 from 13.5 per cent in 2008. This is merely a statistical relationship due to the contraction in nominal GDP…despite this, it appears that the government has refrained from drastically reducing debt, given that it has already incurred a fiscal deficit last year.”

NCB said that while the government has more than enough reserves to pay off its entire debt, the “opportunity cost of doing so is considered to be high.”

“In other words, the cost of servicing the debt now would be small compared to returns from using its foreign assets to diversify investments abroad or finance expenditure plans at home,” it added.

Official data showed Saudi Arabia’s public debt climbed to its highest ever level of around SR690 billion (Dh683 billion) at the end of 1999 before plunging to nearly SR660 billion (Dh654 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 (Dh610 billion) at the end of 2004. At the end of 2005, the debt plummeted to SR475 billion (Dh470 billion) and continued its plunge to reach about SR267 billion (Dh262 billion) at the end of 2007, nearly 18.7 per cent of Saudi Arabia’s nominal GDP.

The debt was sharply cut in 2008 after Saudi Arabia recorded its highest ever budget surplus of SR590 billion (Dh584 billion) as a result of a surge in oil prides to an all time high of more than $95 a barrel.

NCB expected Saudi Arabia to maintain a fiscal expansionary policy it adopted following the eruption of the crisis in September 2008.

“Given the uncertainty regarding the pace of global recovery, continued spending in 2011 is not only necessary but also feasible for the Saudi government….with a low domestic debt-to-GDP ratio and currently low interest rates, there is plenty of room to resume an expansionary fiscal policy,” it said.

“Moreover, the exceptionally strong external position coupled with the anticipated increase in oil prices means that the government can increase spending and compensate for any unexpected loss of foreign funding.”

It noted that Saudi Arabia’s net foreign assets are currently at a healthy position, equivalent to approximately 56 months of imports, the highest import coverage on record. The report expected the assets to swell further at the end of 2010 based on expectations of higher oil prices.

“As such, we believe these assets will continue to provide an important safety cushion in the event of adverse oil price developments or external financing difficulties….nevertheless, sustainable recovery will depend not only on the amount of spending, but also on its quality,” it said.

“That is why the budget will continue to emphasize both physical and human capital expenditure. In addition, the government will continue to allocate funds to specialized credit institutions to support private investment and consumption.”

NCB forecast Saudi Arabia’s crude export earnings at around SAR619 billion, nearly 38 per cent higher than actual level in 2009, which also takes into account a 1.6 per cent growth in export volume.

Non-oil revenues are also projected to increase to SR71 billion in 2010, based on slightly higher interest income earned on foreign assets and higher government fees in line with stronger economic performance expected for 2010.

Actual expenditures will most likely exceed budgeted expenditures, by around 12 per cent to reach SR605 billion, the report showed.

This is also around 10 per cent higher than actual spending levels in 2009, which is a reflection of the government’s continued expansionary fiscal policy stance in order to support economic recovery in 2010.

It said the current account balance would also likely attain a higher surplus at around 10.8 per cent of GDP in 2010, as hydrocarbon and non-hydrocarbon exports are expected to increase by about 24 and 13 per cent, respectively.

“The focus of the budget remains to be on capital expenditure. Out of SR540 billion, SR260 billion or 48 per cent has been allocated for capital expenditure in the 2010, around 16 per cent higher than the 2009 budget,” it said.

“This commitment had been evident from the fact that 652 contracts worth SR40 billion had been awarded for infrastructure projects in the first four months of 2010. While continuing to allocate resources to infrastructure, the budget also prioritizes spending in social sectors, namely education and health….we believe this is positive given that the pace of global recovery remains uncertain and the need to upgrade infrastructure and create jobs in the medium-term.”