Saudi debt may drop drastically on expected higher oil exports

Higher oil exports in the next two years will allow Saudi Arabia to reduce its public debt to one of its lowest levels in two decades after it surpassed the Gulf Kingdom's economy 10 years ago, according to a key Saudi bank.

The domestic debt of the world's oil powerhouse

has already plummeted by more than 60 per cent to around SR235 billion (Dh232bn) by the end of 2008 and is projected to have fallen further to SR225bn at the end of 2009, Banque Saudi Fransi (BSF) said in its economic bulletin.

The debt is projected to decline to around SR209bn at the end of 2010 and nearly SR186bn at the end of 2011, it said.

"We continue to regard Saudi Arabia's position vis-à-vis domestic debt as unique compared with its neighbours in the Gulf and under the G20 umbrella.

As a percentage of GDP, Saudi public debt, all of which is domestic, is likely to fall to 13.2 per cent in 2010 according to our forecast and 18 per cent as per the IMF's forecast. From a macroeconomic perspective, the growth threshold for external debt is considerably lower than for domestic government debt."

The debt swelled above GDP in late 1990s because of heavy government borrowing from local banks to finance a persistent budget deficit caused by a decline in oil prices and the country's crude output.

Official data showed the public debt climbed to its highest ever level of around SR690bn at the end of 1999 before plunging to nearly SR660bn at the end of 2002.

It 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 SR475bn and continued its plunge to reach SR267bn at the end of 2007, nearly 18.7 per cent of the GDP of SR1.43trn.

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 oil prides to their highest average of around $95 a barrel. This boosted the Kingdom's revenue to a record SR1,100bn.

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. BSF expects the ratio to dip to 13.2 per cent in 2010 and 10.4 per cent at the end of 2011, one of its lowest levels in nearly 20 years.

A breakdown by Sama, the Kingdom's Central Bank, showed the debt was slashed by 25 per cent to SR459.6bn in 2005, by 21 per cent to SR364.6bn in 2006 and by a record 27 per cent to SR266.7bn at the end of 2007.

The debt level at the end of 2008 was far below the maximum 60 per cent limit required by each member of the planned GCC monetary union, which groups Saudi Arabia, Kuwait, Qatar and Bahrain.

According to a recent study by the Saudi Jadwa Investments company, Riyadh had sufficient resources to wipe out the public debt last year but that it had been reluctant to do so within a drive to tackle inflation.

"The government has more than enough reserves to pay off its entire debt, yet it continues to use more of the budget surplus to build up these reserves than to cut debt," the Riyadh-based company said.

"Many people assume that debt is bad and that it should be eliminated. It is certainly the case that too much debt is a bad thing and the debt situation in the late 1990s was a concern. However, there are a number of good reasons why the government needs some debt and why repaying it all would have a negative impact on the economy, particularly in fuelling inflation."

BSF agreed that Saudi Arabia controls sufficient funds abroad to eliminate debt but added a drawdown from those assets through 2009 was used to support the government's counter-crisis fiscal stimulus involving a sharp rise in spending.

Citing Sama's figures, it said those assets exceeded GDP at the end of November and expected further growth this year due to higher oil revenue.

"Foreign assets will continue to support the government's expansionary spending programme, but with higher oil income during the course of the year, we expect Sama's net foreign assets to swell 14 per cent this year to SR1.67trn."

It said that besides the fiscal support they provide, foreign assets have played a key role in supporting international financial institutions since the 1970s.

"There are certain areas, however, for which the government has not drawn on its foreign assets – Sama has not deployed foreign assets to redeem government debt, entirely held domestically by local banks and other institutions. This avenue would not be prudent given the leakage in the form of foreign deposits abroad, impacting net foreign assets in a cyclical manner," BSF said.

BSF forecast Saudi Arabia's oil export earnings to surge to around $202bn in 2010 and $218bn in 2011 from nearly $152.9bn in 2009.

 

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