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Saudi Curbs Spending for Unemployment Benefits

Middle East : 26 October 2012

Source: Emirates 24|7

High oil prices to widen 2012 fiscal surplus and depress public debt

Saudi Arabia has not boosted public spending significantly this year although it is projected to net its highest ever income as the world’s dominant oil power needs to meet its financial commitments to a large number of unemployed Saudis.

But the Gulf Kingdom, the largest Arab economy, is expected to record a large fiscal surplus this year while its public debt will continue to fall.

Forecasts by the Riyadh-based Jadwa Investments showed high crude prices and the country’s production would fetch Saudi Arabia an all time high income of SR1.08 trillion (Dh1.07 trillion), nearly four per cent higher than last year’s record actual revenue.

Combined with higher non-oil revenues on the back of expanding non-oil sector, this will lead to total revenue of SR1.19 trillion (Dr1.18 trillion) for the year or about six percent higher than last year’s level, Jadwa said in a study sent to Emirates 24/7.

“Such revenues are already sufficient for the government to finance all its planned spending this year comfortably. We do not think the government will raise its spending significantly, though we have made an upward adjustment to our forecast to SR841 billion, in part because there look to be more recipients of unemployment benefit than we had anticipated,” the study said.

“We thus expect the fiscal balance to reach SR347.7 billion this year (14.3% of GDP) compared to SR291 billion (13.5 percent of GDP) in 2011.”

The report said this would allow the government to continue to reduce its public debt from 6.3 percent of GDP in 2011 to 5.6 percent at the end of this year.

Based on an oil production forecast and the fiscal stance, the breakeven oil price for the budget, at which total revenues would cover total expenditure for the year, is estimated at around $74 per barrel (Saudi export crude), it said.

The external position will also benefit from higher oil prices and production, the report said, adding that data for the balance of payments is only available for the first quarter. It put the current account surplus at $47.6 billion, nearly 28.7 percent higher than level of the first quarter of 2011, as a result of much higher oil revenues.

In addition, services payments (for such things such as transport, travel and communications) have increased by 23 percent year-on-year on the back of stronger domestic demand, according to the study.

“On the merchandise trade side, more recent data is available. Imports over the first eight months of the year are 8 percent higher than in January to August of last year. Based on production and price data we estimate that oil exports averaged $24.6 billion per month so far this year or an increase of 9.7 percent compared to the average of last year, while non-oil exports are up by 4 percent year-on-year in the first eigh months, despite a significant decline in August,” Jadwa said.

“Over the remainder of the year, we expect government expenditure and robust domestic demand to maintain high level imports of goods and services. In fact, letters of credit opened at commercial banks for imports for the three months to end-August are 14 percent higher than in the corresponding period of 2011.”

Despite rising imports, the significant increase in oil export revenues, will keep the trade

balance at a comfortable surplus which the report projected to improve to around $258 billion or by five percent year-on-year in 2012.

It said the increase would offset net factor income outflows and to bring the current account surplus to $167.5 billion (25.8% of GDP) up from $158.5 billion last year.

The report said the country’s robust external position is reflected in higher net foreign assets, with official foreign reserves expected to register a record high of $700 billion in 2012 up from $621.5 billion at the end of 2011.

“The downside risk is further deterioration in global growth that could depress oil demand and prices, though this is not our base-case scenario.”

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