Saudi Arabia is expected to overshoot planned spending by a staggering 45 per cent in 2011 but a projected surge in its oil income will turn a fiscal deficit into a surplus by the end of the year, the Gulf Kingdom’s largest bank said on Monday.
Raising its revenue projections for the year boosted the break even price required to balance the country’s budget to nearly $84 a barrel from $65 in 2010 but oil prices are expected to average much higher through the year and the Kingdom could be pumping as high as 8.8 million barrels per day during 2011, National Commercial Bank (NCB) said in a study sent to Emirates 24/7.
The study said the sharp rise in the Kingdom’s oil export earnings would be a key factor in widening its real GDP by 5.3 per cent this year while the domestic debt will be cut further and foreign assets will climb to record high levels.
Announcing its 2011 budget just before the end of 2010, Saudi Arabia assumed revenue at SR540 billion and spending at SR580 billion, leaving a deficit of SR40 billion compared with an actual surplus of SR109 billion in 2010.
But NCB forecasts showed revenue could rocket to SR909 billion this year mainly because of a big leap in oil export earnings, which it projected to rise to SR828 billion from a budgeted estimate of SR459 billion.
It expected actual expenditure to jump to SR846 billion despite a forecast decline in capital spending to SR186 billion from SR256 billion.
NCB said the decline would be more than offset by a surge in current spending to SR660 billion from SR324 billion, basing its assumption to the recent massive financial handouts announced by King Abdullah, involving spending nearly SR500 billion. The figures showed there will be a surplus of SR63 billion in 2011.
“Initially, our assumptions centered on actual expenditures registering an eight-year low growth rate of just five per cent in line with 2011 budget that planned to reduce overspending and ensure long-term fiscal sustainability,” NCB said.
“Ostensibly, the upsurge in current expenditures that more than doubled since 2002 has necessitated the move to curb discretionary spending. In fact, the 7.4 per cent and five per cent increase in 2011 budgeted expenditures and actual expenditures for 2010, respectively, were the lowest since 2002.”
But the report noted that the fiscal stance has changed dramatically with the announcement of the royal decrees which it said would add more than SR180 billion to actual expenditures this year.
It expected oil export revenues to increase by 33 per cent to a near record of around $269.7 billion in 2011. Non-oil exports are also expected to rebound this year, but will grow at a slightly slower pace of around 11 per cent to $36.8 billion due to higher international prices for petrochemicals and other by-products.
“There is a downside risk to our projection that can arise from further deterioration in regional growth, especially that the Middle East’s share of non-oil exports have taken a nose dive from 54.6 per cent in 2009 to 43.5 per cent in 2010, yet the intensity of the decline renders such a scenario less likely.”
On aggregate, total exports are forecast to rise to $306.5 billion in 2011, the second highest on record, compared with $236.4 billion in the previous year. Imports are expected to grow by around 15.2 per cent to $100.2 billion in 2011, which is the highest growth rate since 2008.
“This is based on robust domestic demand supported by supplementary government spending and higher global prices for food, raw materials and capital equipment this year. Accordingly, we expect the current account surplus to reach a significant $108.4 billion this year, much larger than the $69.6 billion in 2010, and at about 20.9 per cent relative to GDP.”
According to NCB, the economy's robust external position will be reflected in higher net foreign assets this year. In 2010, these assets grew by 8.6 per cent to reach SR1.65 trillion, and a historical high of SR1.73 trillion in 2011YTD.
“We expect net foreign assets to reach nearly SR1.86 trillion by the end of this year and to cover more than 59 months of imports, with a larger proportion to remain USD-denominated and fairly liquid,” the report said.
“Government debt will remain entirely domestic and one of the lowest on a global scale. Most of the debt is owed to two pension funds (GOSI and the Public Pension Agency), while the remaining is held at commercial banks.
In 2010, the stock of debt was reduced further, from around SR225 billion to SR167 billion, nearly10.2 per cent relative to GDP.”
NCB noted that although the Saudi government has more than enough reserves to pay off the entire debt, it opted out from such direction, especially that the cost of servicing the debt is currently low.
“We do still believe that the government, justifiably, prefers rather to spend money to finance expenditure plans at home or to diversify investments abroad.
Evidently, it is important to keep a level of sovereign debt as a monetary tool to manage money supply and as a benchmark for pricing private corporate bonds.”
Turning to the economy, NCB projected real GDP growth to accelerate to 5.3 per cent in 2011, following last year’s 3.8 per cent growth.
“The year 2010, in our opinion, was an inflection point with the domestic economy gaining traction and the growth this year expected to be the highest since 2003...attributed to the rebound in crude oil output and anticipated private investment in the non-oil sectors, the economy is expected to gather pace,” it said, adding that the oil sector remains the core of economic activity.
OPEC’s reduced quotas over the last two years. But with higher meanwhile, non-oil GDP has become an increasingly important driver of economic growth, and will be supported directly and indirectly by the series of royal decrees issued by the King earlier in February and March.
“Moreover, we estimate that real oil GDP will expand by around 5.7 per cent in 2011, higher than 2.1 per cent posted in 2010, and the fastest pace of growth since 2005. The abovementioned projections will, of course, be contingent on the direction of the war conflict in Libya, the resilience of global demand conditions and stability in the international financial environment.”