Saudi fiscal surplus to widen in 2011

Strong oil prices will ally with a 10 per cent rise in Saudi Arabia’s crude production to expand its actual fiscal surplus this year despite a projected sharp increase in public spending, a key Saudi bank has said.

The Saudi American Bank Group (Samba) said actual public expenditure in the first half of 2011 was less than had been expected but it forecast a whopping rise of 26 per cent in spending in the second half of the year because of increases in public sector salaries, social security payments, and subsidies.

“We also think that this spending increase will be more than matched by gains in oil revenue,” SAMBA said in its quarterly bulletin.

Its figures showed oil prices saw sharp declines in early August, leading a fall in global equities, and the benchmark WTI was trading at $82/b in mid-August, down from $100/b in late June and a peak of $114/b at end April.

Yet, the average for WTI to date is still $98/b, compared to earlier forecast for a full-year average of $92/b, the report said.

“Revenue will also be supported by a 10 percent increase in crude oil output, which is a response both to the ongoing outage in Libya and ever-increasing levels of domestic demand. There will also be a useful contribution from NGL production, as well as fees from buoyant domestic trade,” Samba said.

“These trends suggest that the fiscal position will record a surplus of around 10 percent of GDP, up from about seven percent last year. This will allow a further augmentation of public sector domestic savings, which had already increased to SRone trillion by end-June, up from SR992 billion at end-2010.”

The report said the build-up in public sector domestic deposits suggests that the overall public sector is also in comfortable surplus but it noted that this cannot be confirmed since there are no published general government fiscal accounts.

Samba gave no surplus figures but in 2010 it stood at SR109 billion ($29 billion) against a deficit of SR87bn in 2009.

Saudi Arabia, the world’s top oil supplier, had budgeted a deficit of SR40bn for 2011 but the budget was based on a Saudi average crude price of around $60, far below the expected average this year. Oil production is also forecast to be at least 500,000 bpd above projections.

In a recent study, the Riyadh-based Jadwa Investment expected the Gulf kingdom’s actual revenue to rocket by nearly 75 per cent to SR948bn in 2011 compared with a budget of SR540bn. But it also projected actual spending to shoot up by 42 per cent to SR821bn from budgeted SR580bn.

Samba said the sharp rise in spending in Saudi Arabia over the past years has largely aggravated its non-oil deficit, adding that this could be of concern to the government as it means heavier reliance on volatile crude sales.

“There are structural concerns with the fiscal position however.

Expenditure growth over the 2002-2011 period is set to average 13 percent, compared with just two percent in the previous decade,” it said.

“This growth has increased the dependence on oil revenue—a relationship that is captured by the increase in the non-oil fiscal deficit, which has ballooned from 25 percent of nonoil GDP in 2002 to a projected 75 per cent in 2011.Clearly, an oil-based economy will always have a large non-oil 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.”

Samba  said it was not predicting any such downturn, but added that the vulnerability remains. “Moreover, the vulnerability can become more pronounced with additional current spending commitments, since these, unlike capital spending, can be difficult to reverse.”

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