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29 February 2024

Saudi surplus to shrink to $48bn

By Agencies
Saudi Arabia expects its budget surplus to shrink by a third to $48bn and economic growth to slow in 2007 after the world's top oil exporter cut output to follow OPEC (Organization of Petroleum Exporting Countries) policy, raised spending and paid off debt.

The finance ministry forecast a surplus for 2008, the sixth in a row, after two
 decades in which low oil prices left the government struggling to fund its welfare system. The 2006 surplus was $77bn, according to revised ministry figures.

Government debt would fall to 19 per cent of gross domestic product by the end of 2007 compared with 28 per cent of GDP in 2006, the finance ministry said in a statement on Monday.

A near five-fold increase in oil prices since 2002 has allowed
Saudi Arabia to slash public debt   all of which is owed to local institutions
from a peak of 119 per cent of GDP in the late 1990s.

The government set aside 53.5 billion riyals ($14.27bn) from the
 2007 surplus to pay back debt, just over half the amount allocated last year, the ministry said.

"They have to strike a balance and try to make sure that money supply doesn't
generate too much inflation in the economy," said Muhammed Younas Malick, a senior economist at National Commercial Bank, which forecast a $66bn surplus.

"If they pay it all back too quickly there will be too much liquidity in the market," he said.

In 2005 Finance Minister Ibrahim al-Assaf promised to reduce public debt to almost zero. Since then inflation has surged, hitting its highest in at least 12 years in October and money supply, an indicator of future inflation, is near a three-year high.

The Saudi central bank can do little to contain inflation because it must follow U.S. monetary policy to maintain the riyal's peg to the dollar. If it severs the peg,
the riyal will appreciate, reducing the local currency value of dollar denominated oil revenue.
Oil accounts for just under 50 per cent of Saudi Arabia's gross domestic product,
which the finance ministry said would grow 3.5 per cent in 2007 compared with 4.3 per cent last year.

"Mostly it was OPEC production cuts," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate. "Next year, with production going up, growth should be closer to 5 per cent," he said.

The OPEC agreed to cut output by a total of 1.7 million barrels in two
 moves that took effect on November 1, 2006 and February 1 this year. Saudi Arabia, as OPEC's largest producer, shouldered the bulk of the cuts.

The non-oil industrial sector would grow 8.6 per cent in 2007, the ministry said.

The 2008 budget forecast expenditure of 410 billion riyals and revenues of 450 billion riyals, the ministry said. Saudi budgets are usually based on conservative oil-price forecasts. Last year the ministry said it expected a 2007 surplus of $5.3 billion.

The government will spend 105 billion riyals on education and 44.4 billion riyals on health and social development, the ministry said.

The 2008 spending target is about 7 per cent higher than this year's.

The 2008 budget "suggests an assumed price of around $50 a barrel," said Simon William, regional economist at HSBC in Dubai.

U.S. crude oil for January delivery was trading around $88 a barrel on Monday. (Reuters)