Saudi Arabia Budget 2010 | Price Of Oil | Current Account

Saudi Arabia Budget 2010

A show of strength
22 DECEMBER 2009

Key budget highlights
• The year 2009 will go down as one of the most eventful in the Kingdom’s history. The first half of the year was characterized by a precipitous decline in the oil sector while the recovery in oil prices starting in the spring revived activity unexpectedly quickly. During the year, Saudi Arabia posted its first budget deficit in eight years as government revenues fell by over 54% to SAR505bn. Despite increased spending, the actual deficit of SAR45bn fell short of the budgeted SAR65bn, thanks to a rebound in crude oil prices. The average YTD OPEC basket oil price already stands at USD60 per barrel, significantly higher than the USD44 assumed in the 2009 budget. • Driven by higher government spending, the Kingdom’s economy expanded 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 restricted quotas and lower prices, growth was largely driven by the non-oil sector which expanded by 3.0%. The government sector with 4.0% growth was a particularly important source of resilience while the private sector expanded by 2.5%. • For 2010, the government projects revenues of SAR470bn, 14.6% higher than the SAR410bn budgeted in 2009. Spending is set to expand by 13.7% to SAR540bn from SAR475bn. The deficit is set to broadly match this year’s figure at SAR70bn. • The oil price remains the key risk for the Saudi economic outlook in 2010. OPEC now expects a 0.8% increase in total crude oil consumption to 84.93 mb/d in 2010. The OPEC Secretary General Abdalla El Badri has already hinted at a possible easing in production quotas if oil prices stabilize above USD80 per barrel. However, the environment of elevated economic risks globally means that a possibility of a downward correction cannot be ruled out either.
Exhibit 1: Saudi Arabia macroeconomic indicators
2005 Real GDP (%) Hydrocarbon Non-hydrocarbon Nominal GDP (%) Inflation (%) Current account balance (% of GDP) 6.1 7.8 5.2 23.6 0.7 29.3 18 2006 3.2 -0.8 5.1 13.0 2.4 27.8 21.2 2007 3.4 0.5 4.7 7.1 4.0 24.9 12.4 2008 4.5 5.0 4.3 21.9 9.9 29.2 34.1 2009* 0.1 -5.9 3.0 -22.0 4.4 5.5 -3.3 2010e 3.8 4.3 3.6 12.5 5.0 0.7 5.5

Chief Economist Dr Jarmo T. Kotilaine

Fiscal balance (% of GDP)

Source: SAMA, NCBC Research estimates; *Provisional numbers from Saudi Ministry of Finance

Please refer to the last page for important information


its Specialized Credit Institutions including the Real

Budget summary
The 2010 budget underscores the government’s continued determination to support economic activity despite initial signs of a global recovery. It further highlights the strong focus on economic diversification as spending on physical and social infrastructure has been further enhanced. This ambitious agenda will be pursued from a position of relative fiscal strength in spite of the ongoing global crisis. The government now projects revenues of SAR470bn in 2010, 14.6% higher than the 2009 budgeted figure of SAR410bn but 6.9% lower than the actual revenues of SAR505bn. The budget foresees government spending of SAR540bn, 13.7% higher than 2009 budgeted expenditure of SAR475bn and 1.8% lower than the 2009 actual expenditure (SAR550bn). These figures would imply a continued budget deficit of SAR70bn. However, a series of surpluses since 2002 has positioned the Kingdom well for an expansionary fiscal stance even in the face of unusually elevated economic uncertainties. A remarkable 40% of the total projected government spending – or some SAR260bn – is directed towards capital investment projects, underscoring the authorities’ determination to upgrade critical infrastructure and to boost the non-oil sector. Spending on education and training has been boosted to SAR137.6bn, or over 25% of the total. New projects in the education space include the construction of 1,200 new schools and the rehabilitation of 2,000 existing school buildings. Healthcare and social services have been allotted SAR61.2bn (11% of the spending), to be used among other things to build 92 new hospitals with a capacity of 17,150 beds and new primary care centers. The government also announced higher spending on physical infrastructure in the form of some SAR23.9bn to be spent on road construction, ports, airports, railways and new postal services. The government plans to spend SAR46.0bn – or 8.5% of the total – In the water, agriculture and infrastructure areas. Spending priorities include new water sources and improved water and sewage networks. In further stimulus spending, the government intends to provide some SAR48.3bn worth of loans through
22 December 2009

Estate Development Fund, the Saudi Industrial Development Fund, the Saudi Credit and Saving Bank, the Agricultural Development Fund, the Public Investment Fund, and the Government Lending Program.

Performance of the economy exceeded expectations in 2009
Saudi Arabia’s real GDP growth has averaged 4.0% since the beginning of this decade. Although a small contraction in real terms was widely expected this year, the provisional estimates from the Ministry of Finance point to modest real growth of 0.15% in 2009, underscoring the resilience of the economy in the face of adversity.
Exhibit 2: Saudi Arabian GDP growth
500 400 300 200 100 0 Average 2000-04 2005 2006 GDP (USD bn) 2007 2008 Real grow th (%) 2009 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Source: SAMA, NCBC Research

Strongly supported by the government’s diversification initiatives, the non-oil GDP has been the main driver of Saudi growth in recent years. This pattern was even more pronounced during a year when the hydrocarbons sector underwent a contraction but the non-oil sectors of the economy recorded solid growth of 3.0%. Highlighting the importance of stimulus spending, the government sector grew by 4.0% while the private sector expanded by 2.5% in 2009.
Exhibit 3: Oil and non-oil GDP growth
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Average 2000-04 2005 2006 2007 2008 2009

Oil GDP grow th (%)

Non-oil GDP grow th (%)

Source: SAMA, NCBC Research



Higher oil prices and rapid economic growth have allowed Saudi Arabia to register huge current account and fiscal surpluses in recent years. However, the global economic turmoil and the decline in oil prices led to their sharp erosion in 2009. According to the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s current account surplus declined by 84.5%, from SAR496.2bn (or 28.6% of GDP) in 2008 to SAR76.7bn (5.5% of GDP) in 2009.
Exhibit 4: Fiscal & current account balance (% of GDP)
35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Average 2000-04 2005 2006 2007 2008 2009

government authorities comfortable with the current oil price and OPEC quotas expected to increase only marginally, 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 in 2010, in line with our assumption of average oil prices at USD73 per barrel, we forecast 2010e surplus to stand at around SAR80bn as compared to the current government forecast of a deficit of SAR70bn. However, likely above-budget government spending in line with recent years remains a source of uncertainty.
Exhibit 5: KSA crude oil production and exports
10 8 6 4 2 0

Fiscal balance

Current account balance

Source: SAMA, NCBC Research

Average 2005 2006 2007 2008 2000-04 Crude oil production (mbpd) Crude oil exports (mbpd)

Foreign exchange reserves and government debt during 2009
Saudi Arabia’s foreign assets mirrored the change in oil prices during 2009. Following the sharp correction during the initial months of the year, SAMA reported a decline in net foreign assets from SAR1,617bn in January 2009 to SAR1,433bn in July, a development that highlighted the sharper trade-off between current spending needs and reserve building. However, with oil prices on an uptrend since June 2009 – and currently hovering in the range of USD7580 per barrel – SAMA has been reporting increases in the net foreign assets to SAR1,459bn at the end of October 2009. The 22.0% decline in nominal GDP to SAR1,384bn in 2009 had a negative impact on the country’s public sector indebtedness in a marked reversal of recent trends. Government debt as a proportion of GDP increased marginally from 13.5% in 2008 to 16.0% in 2009.

Source: SAMA, NCBC Research

Saudi Arabia has ramped up its crude oil production capabilities in recent years with the daily total now touching 12.5mn barrels. However, under the OPEC’s quota regime and its own strong commitment to oil price stabilization, the Kingdom sharply cut crude production in 2009. The next move is likely to be up, however, which will position Saudi Arabia well to capitalize on the global recovery.
Exhibit 6: Money supply and inflation
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Average 2000-04 2005 2006 2007 2008 2009 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

CPI inflation (LHS)

Broad money grow th (RHS)

Source: SAMA, NCBC Research

Oil prices to drive government finances
According to our estimates, Saudi oil production in 2009e averaged some 8mn b/d, which translates into a 10% contraction in volumes over 2008. With
22 December 2009

The easy money policy of the last few years, with interest rates at historical lows, has supported a sharp credit expansion in Saudi Arabia. The money supply (as measured by M2) increased by 8.0% in the first ten months of 2009 as bank deposits grew by 8.2% in the same period. However, the total bank


claims on public and private sectors declined by 5.7%. Inflation after reaching historical highs during the middle of 2008, declined to an average of 4.4% in 2009. Renewed pressures in this area are a major risk as the recovery begins to gather pace.

Following an impressive show of resilience in 2009 and supported by a continued strong commitment to government stimulus, Saudi Arabia is well positioned to reap the benefits of a rebounding global economy. The 2010 budget with increased outlays for both physical and social infrastructure development, along with other diversification initiatives, should support a speedy return of the economy to its historical growth trajectory.

22 December 2009



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22 December 2009

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