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Saudi Arabia may reel under a budget deficit in 2010 for the second time in eight years as the world's oil superpower is pursuing a post-crisis expansionary fiscal policy to keep its economy on track, a key Saudi bank said yesterday.
The kingdom, which controls over a fifth of the world's recoverable oil deposits, last year recorded its first fiscal shortfall in eight years after it heavily overshot budgeted expenditure and oil export earnings sharply declined from their record high level of 2008 due to lower prices and output.
Releasing its 2010 budget just before the end of the year, Riyadh forecast a deficit of SR70 billion (Dh69.3bn) and the actual balance is expected to ease by the end of the year but would likely remain in deficit, the Saudi American Bank Group (Samba) said in its February economic bulletin.
Despite an expected rise in oil prices, the budget would record a deficit of around SR44bn mainly because of a large increase in public spending, which Samba said would not put strong upward pressure on inflation.
"The 2010 budget shows that the government has maintained its expansionary stance. The budget projects a deficit of SR70bn, based on revenue of SR470bn and spending of SR540bn," the report said. "The oil price assumption is not revealed in the budget, but we estimate this at around $57 a barrel for Arab Light. This assumes that Saudi Aramco withholds the same proportion of oil revenue in 2010 as it did in 2009."
Samba said although Aramco's capacity expansion plans have been completed, the drive to secure more domestic gas supplies is likely to be stepped up.
The relatively high oil price assumption also reflects rising levels of consumption of oil products, which means less oil is available for export, it added.
"Traditionally, both spending and revenue have been significantly higher than budgeted, and we think this will be the case in 2010," it said. "We, therefore, see spending increasing by around 10 per cent compared to the 2009 actual as capital spending growth is maintained and import costs rise in line with non-oil commodity prices.
"Revenue looks set to record an 11 per cent increase compared to 2009, with oil prices and production both rising, and non-oil revenue recovering as trade picks up. Thus, we see a deficit of around the same nominal level as in 2009, though its relative size will fall to 2.8 per cent of GDP."
Samba's figures showed Saudi Arabia's domestic debt shrank to around SR182bn at the end of 2009 from more than SR200bn at the end of 2008 and a record high of SR660bn in 1999.
It said the decline in the debt last year indicates that the budget deficit was funded by a drawdown of domestic savings rather than fresh debt issues.
"Indeed, the drawdown appears to have been larger than that indicated by the central government deficit, which lends credence to the view that the general government deficit is likely to be bigger than the central government deficit.
"Nevertheless, public sector domestic savings remain ample at SR923bn and we estimate that the central government's net debt position at 2009 end was negative SR741bn or -54 per cent of the GDP."
Despite expansionary fiscal policies triggered by the global crisis, inflation in the kingdom plunged to around 5.1 per cent in 2009 from a record annual high level of 9.9 per cent in 2008. Samba said it expected inflation rates to remain under control in 2010 and 2011 despite high spending and an upward trend in rents.
"Inflationary pressures in the kingdom are moderating and should remain manageable this year and next. The consumer price index eased to 5.1 per cent in 2009, down from 9.9 per cent in 2008. The declining rate of price growth over the year was mainly a result of falls in international food prices, though the tightness of the domestic housing market continued to put upward pressure on rents, which have a heavy weighting in the index," the study said.
"Looking ahead, rents will remain a key driver of price pressures given structural bottlenecks within the housing market and the kingdom's demographic profile. Food prices might track up again, but their trajectory will be less steep than in 2007-2008.
"Inflation among the trading partners has traditionally been an important driver of Saudi inflation [as distinct from the impact of exchange rate movements, which tend not to be passed on by Saudi importers] but we feel that there is still considerable excess capacity within the global economy."
According to Samba, with wage demands also likely to remain muted, global inflationary pressures should remain subdued at least until late 2011.
"Some observers are concerned that Riyadh's accommodative monetary stance will also contribute to inflationary pressures.
"However, with tightly enforced limits on consumer credit and the general weakness of interest rate signals in the kingdom, we do not see this as an especially acute danger.
"Overall, we expect annual price growth to stabilise at around four per cent over the next two years."
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