Saudi Arabia to have fiscal surplus

Strong oil prices will ally with a sharp rise in foreign assets to allow Saudi Arabia to maintain its budget surplus through the next three fiscal years but the non-oil balance has largely deteriorated given its heavy reliance on crude sales.

The outlook for the fiscal position in the world’s top oil explorer remains comfortable, at least from the “top line” perspective, said the Saudi American Bank Group (Samba), one of the largest banks in the region.

Its forecasts showed Saudi Arabia’s oil export revenue would soar by nearly 33 percent this year, following last year’s 47 percent gain.

Crude revenue is expected to contributions from other hydrocarbons sources, such as NGLs, the bank said in a study.

Non-hydrocarbons revenue sources, such as fees and charges, are also likely to grow in line with the buoyant domestic economy, it added. But it also expected public expenditure to surge this year, and stay high in 2012-2013.

“But even allowing for this, revenue gains will be enough to allow fiscal surpluses of an average eight percent of GDP over the 2011-20 period….structurally, however, the fiscal position is not so positive,” Samba said.

Its figures showed expenditure growth over the past decade has been pronounced, averaging around 13 percent a year during 2002-2011 against just two percent in the previous ten-year period.

“This growth has increased the dependence on oil revenue, a relationship that is best captured by the increase in the nonoil fiscal deficit. The non-oil fiscal deficit as a percentage of nonoil GDP has increased from around 25 percent in 2002 to a projected 82 percent in 2011,” the study said.

“Clearly, an oil-based economy will always have a large nonoil fiscal deficit, but the rapid deterioration in this position is of concern since it increases the vulnerability of the government to any pronounced and sustained downturn in oil prices. We are certainly not anticipating any such downturn, but the vulnerability remains.  Moreover, the vulnerability can become more pronounced with additional current spending commitments, since these, unlike capital spending, can become entrenched and be difficult to reverse.”

Turning to the external balance, Samba said the Gulf Kingdom’s current account would continue to record large surpluses in the next few years but added that structural issues mirror those on the fiscal side.

“To a large extent, the current-account outlook mirrors that of the fiscal account. Robust oil export earnings will allow substantial current-account surpluses in the region of 14 percent of GDP over the next three years, allowing a further build-up of net foreign assets, which we expect to reach about $700 billion by end-2013, accounting for nearly 120 percent of GDP,” it said.

“As with the fiscal channel, the balance of payments remains vulnerable to a sharp and sustained downturn in oil prices given the sustained growth of import spending over the past decade (16 percent annual average growth). Nevertheless, the stock of net foreign assets provides a substantial buffer to maintain balance of payments equilibrium should the need arise.”

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