Saudi debt cut by SR30bn in 2011

Saudi Arabia slashed its public debt by nearly SR30 billion in 2011 as the world’s oil powerhouse was tempted by highly elevated crude prices to announce the highest budgetary spending plan in its history.

The largest Arab economy was able to trim the debt and at the same time record a massive fiscal surplus after oil prices climbed to their peak average and fetched the Gulf Kingdom its highest ever income.

From SR165 billion ($44bn) at the end of 2010, the country’s public debt was lowered to SR135bn at the end of 2011 although the entire debt could be covered by the actual surplus achieved this year.

The reduction depressed the debt ratio to GDP to one of its lowest levels of around 6.3 per cent after it exceeded GDP in late 1990s.

“Even though the government has more than enough reserves to pay off the entire debt, it opted out from such direction, especially that the cost of servicing the debt is currently low,” Saudi Arabia’s largest bank, National Commercial Bank (NCB) said in a study sent to ‘Emirates24|7’.

“The government, justifiably, prefers rather to spend this money to finance expenditure plans at home or to diversify investments abroad….evidently, it is important to keep a level of sovereign debt as a monetary tool to manage money supply and as a benchmark for pricing corporate bonds and sukuk.”

NCB expected oil prices to remain strong and supportive of Saudi Arabia’s 2012 expansionary budget, estimating Riyadh’s oil price projection for next year’s budget is around $64 a barrel, far below the current level.

“Oil prices will remain supportive. Although the budget press release does not provide oil price and production level assumptions, we believe that both revenues and expenditures are understated,” it said.

“Based on announced revenues, government assumed next year’s oil prices to average $64...with our forecast of $95 for the average Arabian light spot prices and an 8.8 million bpd for average oil production in 2012, we project revenues and expenditures at SR930bn and SRR780bn, respectively……. this would lead in turn to a budget surplus of around SR150bn, or 7.1 per cent of estimated GDP in 2012.”

Announcing its 2012 record high budget this week, Saudi Arabia forecast spending at an all-time high of SR690bn and revenue at SR702bn, leaving a small surplus of SR12bn.

In 2011, the Kingdom had projected a deficit of SR40 billion but the budget ended the year with a huge surplus of SR306 billion after revenue swelled to their highest ever level of SR1,110 billion.

“The fiscal policy stance will continue to be expansionary….the 2010-2014 ninth five-year development plan allocation of SR1.44 trillion to capital expenditures, 67 per cent more than the previous plan, have underscored he government’s commitment to prop-up outlays to all sectors,” NCB said.

“The 2012’s budget continues to reflect the government's focus on long-term sustainable development that requires investment in infrastructure, education, health care, and social and economic development projects.”

Before the latest oil boom of 2003-2008, Saudi Arabia had suffered from massive budget shortfalls and soaring public debt, which oversized its GDP in 1999 when it peaked at an all time high of SR689 billion.

It dipped to nearly SR660bn at the end of 2002 and remained almost unchanged by the end of 2003 before it began its rapid slide in the following years to reach SR614bn at the end of 2004.

At the end of 2005, the debt plummeted to SR475 billion and continued its plunge to reach about SR267bn at the end of 2007, nearly 18.7 per cent of Saudi Arabia’s nominal GDP of SR1.430bn.

The debt was sharply cut in 2008 after Saudi Arabia recorded its highest ever budget surplus of SR590bn as a result of a surge in average oil prides to an all-time high of around $95 a barrel.

The decline depressed the ratio of the debt to the GDP from more than 100 per cent to 65 per cent in 2004 and only 13.4 per cent at the end of 2008. But it climbed again to around 16.3 per cent in 2009 due to a sharp drop in GDP because of lower crude prices and output.