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Saudi Arabia Budget 2010

Saudi Arabia Budget 2010

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Published by: Hamza on Jul 11, 2010
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11/18/2010

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Chief Economist
Dr Jarmo T. Kotilaine
  j.kotilaine@ncbc.com
Please refer to the lastpage for importantinformation
22 DECEMBER 2009
 
Saudi Arabia Budget 2010
A show of strength
Key budget highlights
 
The year 2009 will go down as one of the most eventful in theKingdom’s history.
The first half of the year was characterized by aprecipitous decline in the oil sector while the recovery in oil prices starting inthe spring revived activity unexpectedly quickly. During the year, Saudi Arabiaposted its first budget deficit in eight years as government revenues fell byover 54% to SAR505bn. Despite increased spending, the actual deficit of SAR45bn fell short of the budgeted SAR65bn, thanks to a rebound in crude oilprices. The average YTD OPEC basket oil price already stands at USD60 perbarrel, significantly higher than the USD44 assumed in the 2009 budget.
 
Driven by higher government spending, the Kingdom’s economyexpanded by a real 0.15% in 2009
, confounding widespread expectations of a small decline. In the face of a sharp oil sector contraction due to restrictedquotas and lower prices, growth was largely driven by the non-oil sector whichexpanded by 3.0%. The government sector with 4.0% growth was aparticularly important source of resilience while the private sector expanded by2.5%.
 
For 2010, the government projects revenues of SAR470bn, 14.6%higher than the SAR410bn budgeted in 2009.
Spending is set to expand by13.7% to SAR540bn from SAR475bn. The deficit is set to broadly match thisyear’s figure at SAR70bn.
 
 
The oil price remains the key risk for the Saudi economic outlook in2010.
OPEC now expects a 0.8% increase in total crude oil consumption to84.93 mb/d in 2010. The OPEC Secretary General Abdalla El Badri has alreadyhinted at a possible easing in production quotas if oil prices stabilize aboveUSD80 per barrel. However, the environment of elevated economic risksglobally means that a possibility of a downward correction cannot be ruled outeither.
Exhibit 1: Saudi Arabia macroeconomic indicators
20052006200720082009*2010e
Real GDP (%) 6.13.23.44.50.13.8Hydrocarbon 7.8-0.80.55.0-5.94.3Non-hydrocarbon 5.25.14.74.33.03.6Nominal GDP (%) 23.613.07.121.9-22.012.5Inflation (%) 0.72.44.09.94.45.0Current account balance (% of GDP) 29.327.824.929.25.50.7Fiscal balance (% of GDP) 1821.212.434.1-3.35.5
Source: SAMA, NCBC Research estimates; *Provisional numbers from Saudi Ministry of Finance
 
 22 December 2009 2SAUDI ARABIA BUDGET 2010
Budget summary
The 2010 budget underscores the government’scontinued determination to support economic activitydespite initial signs of a global recovery. It furtherhighlights the strong focus on economic diversificationas spending on physical and social infrastructure hasbeen further enhanced.This ambitious agenda will be pursued from a positionof relative fiscal strength in spite of the ongoingglobal crisis. The government now projects revenuesof SAR470bn in 2010, 14.6% higher than the 2009budgeted figure of SAR410bn but 6.9% lower thanthe actual revenues of SAR505bn. The budgetforesees government spending of SAR540bn, 13.7%higher than 2009 budgeted expenditure of SAR475bnand 1.8% lower than the 2009 actual expenditure(SAR550bn). These figures would imply a continuedbudget deficit of SAR70bn. However, a series of surpluses since 2002 has positioned the Kingdom wellfor an expansionary fiscal stance even in the face of unusually elevated economic uncertainties.A remarkable 40% of the total projected governmentspending – or some SAR260bn – is directed towardscapital investment projects, underscoring theauthorities’ determination to upgrade criticalinfrastructure and to boost the non-oil sector.Spending on education and training has been boostedto SAR137.6bn, or over 25% of the total. Newprojects in the education space include theconstruction of 1,200 new schools and therehabilitation of 2,000 existing school buildings.Healthcare and social services have been allottedSAR61.2bn (11% of the spending), to be used amongother things to build 92 new hospitals with a capacityof 17,150 beds and new primary care centers.The government also announced higher spending onphysical infrastructure in the form of someSAR23.9bn to be spent on road construction, ports,airports, railways and new postal services. Thegovernment plans to spend SAR46.0bn – or 8.5% of the total – In the water, agriculture and infrastructureareas. Spending priorities include new water sourcesand improved water and sewage networks.In further stimulus spending, the government intendsto provide some SAR48.3bn worth of loans throughits Specialized Credit Institutions including the RealEstate Development Fund, the Saudi IndustrialDevelopment Fund, the Saudi Credit and SavingBank, the Agricultural Development Fund, the PublicInvestment Fund, and the Government LendingProgram.
Performance of the economyexceeded expectations in 2009
Saudi Arabia’s real GDP growth has averaged 4.0%since the beginning of this decade. Although a smallcontraction in real terms was widely expected thisyear, the provisional estimates from the Ministry of Finance point to modest real growth of 0.15% in2009, underscoring the resilience of the economy inthe face of adversity.
Exhibit 2: Saudi Arabian GDP growth
Source: SAMA, NCBC Research
Strongly supported by the government’sdiversification initiatives, the non-oil GDP has beenthe main driver of Saudi growth in recent years. Thispattern was even more pronounced during a yearwhen the hydrocarbons sector underwent acontraction but the non-oil sectors of the economyrecorded solid growth of 3.0%. Highlighting theimportance of stimulus spending, the governmentsector grew by 4.0% while the private sectorexpanded by 2.5% in 2009.
Exhibit 3: Oil and non-oil GDP growth
Source: SAMA, NCBC Research
0100200300400500Average2000-042005 2006 2007 2008 20090.0%1.0%2.0%3.0%4.0%5.0%6.0%GDP (USD bn) Real growth (%)-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%Average2000-042005 2006 2007 2008 2009Oil GDP growth (%) Non-oil GDP growth (%)
 
 22 December 2009 3SAUDI ARABIA BUDGET 2010
Higher oil prices and rapid economic growth haveallowed Saudi Arabia to register huge current accountand fiscal surpluses in recent years. However, theglobal economic turmoil and the decline in oil pricesled to their sharp erosion in 2009. According to theSaudi Arabian Monetary Agency (SAMA), theKingdom’s current account surplus declined by84.5%, from SAR496.2bn (or 28.6% of GDP) in 2008to SAR76.7bn (5.5% of GDP) in 2009.
Exhibit 4: Fiscal & current account balance (% of GDP)
Source: SAMA, NCBC Research
Foreign exchange reserves andgovernment debt during 2009
Saudi Arabia’s foreign assets mirrored the change inoil prices during 2009. Following the sharp correctionduring the initial months of the year, SAMA reporteda decline in net foreign assets from SAR1,617bn inJanuary 2009 to SAR1,433bn in July, a developmentthat highlighted the sharper trade-off betweencurrent spending needs and reserve building.However, with oil prices on an uptrend since June2009 – and currently hovering in the range of USD75-80 per barrel – SAMA has been reporting increases inthe net foreign assets to SAR1,459bn at the end of October 2009.The 22.0% decline in nominal GDP to SAR1,384bn in2009 had a negative impact on the country’s publicsector indebtedness in a marked reversal of recenttrends. Government debt as a proportion of GDPincreased marginally from 13.5% in 2008 to 16.0% in2009.
Oil prices to drive governmentfinances
According to our estimates, Saudi oil production in2009e averaged some 8mn b/d, which translates intoa 10% contraction in volumes over 2008. Withgovernment authorities comfortable with the currentoil price and OPEC quotas expected to increase onlymarginally, we expect oil-sector GDP growth of 4.3%in 2010e in a sharp reversal of this year’s contraction.As the value of exports is likely to recover smartly in2010, in line with our assumption of average oilprices at USD73 per barrel, we forecast 2010e surplusto stand at around SAR80bn as compared to thecurrent government forecast of a deficit of SAR70bn.However, likely above-budget government spendingin line with recent years remains a source of uncertainty.
Exhibit 5: KSA crude oil production and exports
Source: SAMA, NCBC Research
Saudi Arabia has ramped up its crude oil productioncapabilities in recent years with the daily total nowtouching 12.5mn barrels. However, under the OPEC’squota regime and its own strong commitment to oilprice stabilization, the Kingdom sharply cut crudeproduction in 2009. The next move is likely to be up,however, which will position Saudi Arabia well tocapitalize on the global recovery.
Exhibit 6: Money supply and inflation
Source: SAMA, NCBC Research
The easy money policy of the last few years, withinterest rates at historical lows, has supported asharp credit expansion in Saudi Arabia. The moneysupply (as measured by M2) increased by 8.0% in thefirst ten months of 2009 as bank deposits grew by8.2% in the same period. However, the total bank
-10%-5%0%5%10%15%20%25%30%35%Average2000-042005 2006 2007 2008 2009Fiscal balance Current account balance0246810Average2000-042005 2006 2007 2008Crude oil production (mbpd) Crude oil exports (mbpd)
-2.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%Average2000-042005 2006 2007 2008 20090.0%5.0%10.0%15.0%20.0%25.0%CPI inflation (LHS) Broad money growth (RHS)

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