Saudi shunned domestic borrowing in 2009 to encourage bank lending

Saudi Arabia shunned domestic borrowing and resorted to its massive overseas assets to finance its fiscal deficit during 2009 to encourage bank lending to the private sector, a key bank in the kingdom said yesterday.

A decline in the foreign assets of the world's oil powerhouse through 2009 following a steady rise in the previous seven years indicated the government withdrew from those funds to shore up the budget deficit and slightly cut its domestic debt, the Saudi American Bank Group (Samba) said in a study.

"Gross domestic debt witnessed a small decline in 2009 to about SR225 billion (Dh220.35bn), which indicates that the deficit has been funded by a drawdown in domestic savings rather than fresh debt issues," said the report.

"This reflects the authorities' concern to encourage domestic banks to increase private sector lending rather than invest in government securities. Public sector domestic savings remain ample and we estimate that the government's net debt position at end-2009 was negative SR818bn or -60 per cent of GDP," it said.

Saudi Arabia last year suffered from its first budget deficit of about SR45bn in nearly seven years although it was cut from the forecast SR65 shortfall after revenue surpassed budgeted levels.

But according to Samba, both revenue and expenditure were lower than previously predicted although they were higher than the 2008 budget.

"Spending and revenue were lower than we had expected, though both were comfortably larger than the 2009 budget had forecast. At SR550bn, spending was only 5.8 per cent higher than the 2008 outturn (against a ten-year average of 11 per cent)," Samba said in its monthly report.

"At first sight this is odd, given the surge in capital spending witnessed in 2009. The apparent anomaly is explained by the fact that unit costs have fallen and much of the investment push is being undertaken by state-owned enterprises rather than the Central government."

Despite the absence of a breakdown of revenue, Samba said that based on the government's top-line revenue figure of SR505bn, oil earnings could be just under SR430bn, representing a 56 per cent decline on 2008.

"This is a steeper decline than indicated by the changes in oil prices and production and suggests that the state hydrocarbons producer, Saudi Aramco, kept a larger share of oil export earnings for its own capital expenditure."

Turning to the 2010 record budget announced last month, it said spending shows the government has maintained its expansionary stance to keep the economy on track following what it described a near stagnation in 2009 because of a decline in the oil sector and tight bank credit.

It said the budget projects a SR70bn deficit and estimated that Riyadh had assumed a price of $57 a barrel for its Arab Light. "This assumes that Saudi Aramco withholds the same proportion of oil revenue in 2010 as it did in 2009.

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