Saudi to post 4% fiscal surplus

Spending by Saudi Arabia in 2012 will likely be higher than budgeted, but the country will still run a fiscal surplus of four per cent of GDP, said Fitch Ratings.

Spending growth will moderate in 2012 compared with last year. In 2011, spending growth reached 24 per cent, the highest in a decade. The government raised public sector wages, created government jobs, injected capital into state-owned lenders and pledged more resources for housing. Capital spending - mainly on infrastructure - exceeded 12 per cent of GDP.

Saudi budgets typically underestimate both revenue and spending. In 2002-2011, central government spending exceeded the budget by an average of 24.8 per cent. But in each year other than 2009, oil prices lifted revenues beyond expectations, giving the government room to spend more without running a deficit.

In its National Budget released December 26, the Ministry of Finance projected total revenues of SAR702bn ($187.2bn) and government expenditure of SAR690bn, giving a surplus of SAR12bn.

This appears to be based on a conservative oil price assumption. Assuming Saudi Arabia reduces oil output to an average of 9mbd in 2012, the breakeven oil price would be around $60/b.

However, a budget overspend in line with the recent historical average would result in spending of SAR846bn and push up the breakeven oil price to $75/b. At Fitch's oil price assumption of $100/b, revenue would reach SAR907bn, giving a surplus of SAR61bn, or around 4 per cent of GDP.

Over the medium term, there is still a possibility of Saudi Arabia running a deficit by 2015. Assuming 7 per cent spending growth - which would be lower than the annual average of 12.5 per cent in 2002-2011 - modest oil output growth, and an average oil price of $100/b, the country would run a deficit of 1 per cent of GDP by 2015.

Fitch rates Saudi Arabia 'AA-' with a Stable Outlook. The high investment grade rating largely reflects the very strong sovereign and external balance sheet. The sovereign balance sheet improved further in 2011, despite the highest spending growth in a decade. Sovereign net foreign assets grew by over $100bn to 112 per cent of GDP. With Brent averaging $110/b, the general government surplus for the year was 14 per cent of GDP, higher than our expectation of 7.5 per cent when we affirmed the rating on April 8, 2011. That estimate was based on an assumption of $100/b.

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