Saudi spending seen at record high in 2011

Recent announcements by King Abdullah of Saudi Arabia to lavish nearly $130 billion in benefits to citizens will boost the Gulf Kingdom’s public spending to an all-time high this year but the budget will still record a surplus.
Forecasts by a key bank in the world’s dominant oil power showed spending could rocket by nearly 24.5 per cent over the budgeted expenditure to SR824.4 billion, an increase of 34.5 per cent over the 2010 spending.
But the surge is expected to be offset by a sharp increase in oil prices and the country’s crude output to one of its highest levels of 8.9 million barrels per day, Banque Saudi Fransi said in a study sent to Emirates 24/7.
Announcing its 2011 budget before the end of last year, Saudi Arabia said spending would be around 7.4 per cent higher than the 2010 budget, setting it at SR580 billion. It was among the slowest rates in budget expansion in nearly a decade, during which state expenditure nearly doubled.
“This restrained fiscal scenario has taken a U-turn since then with a string of new social and economic initiatives for citizens, unveiled by royal decree in the first quarter, adding an estimated SR185 billion in new expenditures this year alone, according to our estimates,” BSF’s chief economist John Sfakianakis said.
“On account of the burst in spending, we have raised our 2011 state expenditure forecast by 24.5 per cent to SR842.4 billion, representing a substantial 34.5 per cent rise over 2010 figures….this revised forecast also constitutes overspending of 45 per cent on the expenditure target set out in this year’s budget, which would be the fastest pace of overspending in three decades.”
The study said that despite the jump in projected expenditures this year, Saudi Arabia should manage to produce a respectable fiscal surplus owing to a rise in oil prices in the first quarter to $94 a barrel for US crude and $105 for Brent.
Oil production has also climbed in the last three months as the world’s top oil exporter strived to compensate for a shortfall in output by OPEC producer Libya, currently embroiled in political instability.
BSF said it had raised its full-year oil price forecast to $92 a barrel for Saudi crude and expected the kingdom to pump an average 8.9 million bpd of oil this year, around 9.1 per cent higher than the 2010 output.
“As a consequence of the more favourable energy market environment, Saudi Arabia should achieve fiscal revenues of SR904.1 billion, enabling it to post a surplus of SR61.7 billion, or 3.1 per cent of GDP.”
Sfakianakis noted that Saudi Arabia’s net foreign assets hit a record level of SR1.67 trillion ($451 billion) at the end of January before easing slightly in February. He said this gave the Saudi government a great deal of leverage to fund social programmes for its citizens without incurring debt.
“Still, extraordinary fiscal outlays will temper the pace of foreign assets growth, and we expect the end-year total to reach $465 billion.”
He said the rise in oil output, coupled with greater state spending commitments, has also heightened the prospects for higher GDP growth this year.
His forecast showed the Kingdom’s economy, the largest in the Arab world,
Would expand by around 5.5 per cent in 2011 in real terms, up from a previous forecast of about 4.2 per cent, with most of the new growth resulting from a direct increase in crude production.
“Government-steered growth of the non-oil sector growth is also a key factor to consider. We anticipate government sector GDP will rise by about 5.6 per cent this year, its third straight year of growing more than five per cent.”
With all of the new cash circulating in the economy, inflationary pressures are likely to accrue, particularly toward the second half of the year, and could lead to a rise in the overall inflation rate from previous forecast of 5.1 per cent, he said.
 Coupled with high global food prices, the two-month salary bonuses granted to employees of the public sector, as well as many in the private sector, will enhance citizens’ spending power, he added.
“Meanwhile, pressure to speed up home construction with SR250 billion in new state financing could raise the cost of building materials and other inputs in the coming months and years. We have raised our inflation forecast to 5.6 per cent for 2011 in view of these factors.”
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