Saudi set to rein in public spending

Saudi Arabia is expected to put brakes on a fiscal stimulus it enforced in the aftermath of the 2008 global financial crisis although oil prices are projected to remain relatively strong, according to a key Saudi bank.

Although planned spending for 2011 could be higher than in 2010, the rate of growth is forecast to be slower than in the previous year and the curb will affect both budgeted and actual expenditure, Banque Saudi Fransi (BSF) said.

In a study sent to Emirates 24/7, BSF’s chief economist John Sfakianakis said he expected the Saudi government to set spending at not more than SR590 billion when it unveils the 2011 budget later this month.

“We anticipate the government will slow the pace of budget expansion in 2011 and unveil a budget including announced expenditures of not more than SR590 billion, up from SR540 billion this year, a 9.3 per cent increase,” he said.

He said planned expenditures in the 2010 budget were 13.6 per cent bigger than 2009, which itself was 15.9 per cent bigger than the budget a year earlier.

“This slowdown in budget expansion is necessary and prudent following years of overspending budget targets by more than 20,” the study said.

“But it is not only the growth of projected spending that we expect will slow – growth in actual spending is also likely to outpace forecasts by a smaller degree as the government moves to better rationalize spending and implements efforts to rein in excessive spending by government departments.”

According to the study, Riyadh overspent its budget targets by 26 per cent in 2009, adding that such excessive spending is not sustainable in the long term.

“In the meantime, however, budgets are easily financed with rich foreign asset reserves which, due to higher oil prices, the kingdom has been in a position to enlarge this year….in the first nine months of the year, Saudi Arabia’s central bank added SR61 billion to its net foreign asset holdings, taking them to SR1.58 trillion, the highest since February 2009,” the report said.

“At that time, the central bank was drawing down foreign assets to pay for its growing budget during a period of low oil prices.”

BSF said it believed sustaining big budgets does not pose a major concern for Saudi Arabia in the short term because it is ”part and parcel” of the government’s current five-year development plan to stimulate the economy and create the right backdrop for the private sector to operate.

But it added that mushrooming expenditures – which have tripled since 2002 – would raise the oil prices needed to balance Saudi budgets.

“In the early part of the decade, the kingdom had traditionally based its budget on very conservative oil price assumptions that made it easy to post respectable surpluses….but budget breakeven oil prices have risen rapidly along with state expenditures in the last few years and are now similar to the actual oil price.”

Its estimates showed the breakeven price of oil for this year’s budget is around $72 a barrel – compared with $66 a barrel in 2009 and $52 a barrel in 2008.

Next year, the budget breakeven price could rise again to more than $75 a barrel – giving the kingdom very little room to manoeuvre should oil prices weaken from current levels, according to the study.

“At the current pace of government spending, the breakeven price of oil could rise to about $98 a barrel by 2017….. current high state spending could be replaced by spending that creates additional multiplier benefits and a trickle down that has cross-sector reach,” it said.

The report projected this year’s budget deficit of SR70 billion to turn into a surplus of around SR41.3 billion because of a surge in oil revenue despite record high spending. It estimated spending at SR658.9 billion and revenue at SR617.6 billion, far higher than the budgeted revenue of SR470 billion.

The 2010 surplus is against a deficit of around SR86 billion in 2009 but is dwarfed by the record high surplus of SR580 billion achieved in 2008, when average crude prices climbed to an all time high of nearly $95.

BSF also expected high oil prices to sharply widen Saudi Arabia’s current account surplus following a weakness in 2009 because of the crisis.

Its figures showed the account surplus rose to SR74.5 billion in the first quarter of this year, the highest since the onset of the crisis in the third quarter of 2008.

“Given the strong performance and slower import activity in the first quarter of this year, we are raising our current account surplus forecast for 2010 to SR154.15 billion or 9.5 per cent of GDP – almost double last year’s surplus.”

Follow Emirates 24|7 on Google News.