Saudi poised for large fiscal surplus

A sharp increase in oil prices and output will allow Saudi Arabia to record large fiscal surplus despite an expected surge in spending because of benefits announced by King Abdullah over the past weeks, according to a western financial institute.

The Washington-based Institute for International Finance (IIF) also said it had revised up its earlier forecast for Saudi Arabia’s GDP growth from 3.5 to 5.3 per cent because of the projected sharp rise in spending.

Citing Saudi private estimates, it put the total value of social benefit packages at around SR467 billion, equivalent to 27 per cent of 2010 GDP.

The largest component of the new spending is SR250 billion for the construction of 500,000 public housing units for citizens over a period of five years.

“The fiscal balance will remain in a large surplus of 12.7 per cent of GDP in 2011, under the IIF assumption of an average oil price of $115 per barrel for Brent, or $113 per barrel for Saudi crude,” IIF said.

“The sharp increase in government revenue from oil due to higher oil prices, and an expected five per cent rise in export volumes, will more than offset the substantial 31 per cent increase in government spending.”

The report said it expected a significant portion of the increase in spending this year to be permanent and difficult to reverse in the coming years.

It said evidence from many countries shows that once such benefits are in the budget, they could be hard to withdraw without facing strong resistance.

The report estimated the breakeven price of Saudi oil that balances the budget will jump from $68 per barrel in 2010 to $85 per barrel in 2011, and then continue rising, but at a slower pace to $110 per barrel by 2015.

Government spending will also jump from 79 per cent of non-oil GDP in 2010 to around 94 per cent in 2011, and then gradually fall to 86 per cent by 2015, which is still higher than the 82 per cent recorded in 2009.

A breakdown showed the Kingdom’s revenue could soar to the 2008 record high level of nearly SR1,100 billion this year as a result of higher crude prices and an increase in the country’s production to an average 8.9 million bpd. It estimated oil earnings at SR1,005 billion and non-hydrocarbon exports at SR79 billion.

It also expected spending to hit an all time high of SR828 billion, far higher than the budgeted expenditure of SR580 billion.

Despite higher expenditure, a budget deficit of SR40 billion will turn into an actual surplus of SR276 billion in 2011, the second highest fiscal surplus after the 2008 record balance of SR581 billion.

IIF supported Saudi forecasts that the Kingdom’s GDP would grow by more than five per cent this year as a result of higher spending and oil income.

“We have revised our real GDP growth forecast for 2011 up from 3.5 per cent before the regional crisis to 5.3 per cent now, due mainly to higher crude oil production and a substantial increase in government spending,” it said.

Non-hydrocarbon real GDP growth is projected at 5.1 per cent for this year, driven mainly by a large increase in government consumption and investment, at around 5.8 per cent growth in real terms, it said.

Turning to consumer prices, IIF projected the 12-month inflation rate to rise from 4.7 per cent in March 2011 to 7.5 per cent by end-2011 - an average inflation rate of 5.7 per cent in 2011 and 6.5 per cent in 2012 - due to stronger domestic demand and higher global commodity prices.

“The inflationary impact of the new government spending could be manageable if the productive capacity of the economy, particularly the prospects for the supply of housing, improves,” it said.

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