Saudi debt set to drop sharply this year

A surge in petrodollar income is expected to sharply depress Saudi Arabia’s domestic debt this year after swelling to the size of its economy nearly six years ago, said the International Monetary Fund (IMF).

But the world’s oil powerhouse will unlikely use its massive fiscal surplus to completely eliminate the debt as it strives to heal festering inflation that has caused havoc in a market used to heavy subsidies.

From around 18.7 per cent of the gross domestic product (GDP) at the end of 2007, Saudi Arabia’s public debt could plummet to only 11 per cent by the end of this year, the IMF said.

The study presented a positive outlook about Saudi economy this year, with its real GDP rising by five per cent and current account recording its highest ever surplus of nearly $191 billion (Dh700bn), almost 35 per cent of the 2008 GDP.

“The overall fiscal surplus is expected to more than double to 30.4 per cent of GDP, and public debt is envisaged to shrink further to 11 per cent of GDP.

Inflation is projected to peak around 10.6 per cent in 2008, exacerbated by rising imported commodities and domestic supply constraints, but to ease in subsequent years,” the Washington-based Fund said.

Pinched by low oil prices in late 1990s, Saudi Arabia was forced into a massive borrowing drive to shore up its widening budget deficit that was compounded by increases in actual expenditure triggered mainly by a rapid population growth.

The debt jumped to nearly 100 per cent of its GDP in 2000 before it started to ease in the following years because of a gradual rise in crude prices.

It stood at SR660 billion (Dh653.5bn) in 2002, nearly 95 per cent of the GDP of around SR707bn. It remained almost unchanged by the end of 2003 before it began its rapid slide in the following years to reach SR614bn at the end of 2004.

At the end of 2005, the debt plummeted to SR475bn and continued its plunge to reach SR267bn at the end of 2007, nearly 18.7 per cent of the GDP of SR1.43 trillion.

The IFM gave no figures for the expected size of the domestic debt at the end of this year but its figures showed it could be around $59bn considering the GDP is projected at $540bn in 2008. The surge in oil prices over the past six years has combined with higher output to sharply push up Saudi Arabia’s crude export earnings, which could top $340bn this year compared with nearly $206bn in 2007 and $188bn in 2006.

The income stood at $63bn in 2002 and was as low as $33bn in 1998, when oil prices collapsed below $10 a barrel.

Like other Gulf oil producers, Riyadh has used the surplus funds to tackle its debt, boost development spending and rebuild foreign assets, which exceeded SR1.3trn at the end of May from less than SR200bn nearly six years ago, according to official Saudi figures. IMF forecasts showed the assets could reach SR1.59trn at the end of 2008.

“The Saudi Government has more than enough reserves to pay off its entire debt, yet it continues to use more of the budget surplus to build up these reserves than to cut debt,” said the Riyadh-based Jadwa Investment firm, one of the leading financial and investment consultants in Saudi Arabia.

“Many people assume that debt is bad and that it should be eliminated. It is certainly the case that too much debt is a bad thing and the debt situation in the late 1990s was a concern. However, there are a number of good reasons why the government needs some debt and why repaying it all would have a negative impact on the economy, particularly in fuelling inflation.

“Saudi Arabia’s debt position is now comfortable,” Jadwa said.

 

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