The budget for 2011 was approved by the Council of Ministers on December 20, 2010. It emphasizes infrastructure and social spending and includes a 7.4% rise in state expenditure targets while maintaining a conservative outlook on revenues, according to Dr. John Sfakianakis, Chief Economist of Banque Saudi Fransi. In a comprehensive report, “Ready to roll: Saudi 2011 budget raises stakes, seeks out private sector,” published yesterday by BSF, he provided a detailed analysis of the budget. [Link] Dr. Sfakianakis, in a separate emailing provided here, also discussed the budget highlights:
Saudi Arabia’s 2011 budget has been endorsed by the Council of Ministers and indicates the government is committed to continue raising expenditures at a healthy pace while reducing its debt burden. Expenditure allocations were raised almost 8% from 2010 levels to SR580 billion, which should be enough to spur solid economic growth and encourage greater private sector participation. The budget emphasises infrastructure and social spending, with education and training accounting for 26% of the total allocation. While the budget demonstrates the state’s willingness to continue steering the economic recovery, it also reduces the pace of budget expansion in a bid to tame overspending, which remained high in 2010 at 16%. Expenditure allocations for 2011 grew at the slowest pace since 2003.
The high oil price environment in 2010 enabled Saudi Arabia to post a very strong budget surplus of SR108.5 billion ($28.9 billion) this year, more than double our forecast, according to the preliminary estimates released in the budget report. We think that the surplus is a combination of higher oil revenues as well as possible lower capex from Saudi Aramco during 2010. Public revenues rose 44.2% from 2009 to SR735 billion, while expenditures climbed 5% to SR626.5 billion. Elevated state spending has played an essential part in maintaining confidence in the economy as the government seeks to re-integrate the private sector into the development process.
The government’s pivotal role in the economy was evident in government sector GDP growth of 5.9% in 2010 up from 4.4% in 2009, according to the Ministry of Finance statement, reflecting the fastest pace of growth in more than a decade. Non-oil private sector GDP grew a respectable 3.7% in 2010, up from 3.5% last year. Real GDP growth of 3.8% was in line with our forecasts, as was nominal GDP of SR1.63 trillion ($434.7 billion). Some non-oil sectors posted good growth, including transport and communications, which grew 5.6%. The performance of other sectors was not as bright; finance, insurance and real estate expanded by only 1.4% at constant prices.
A key highlight for 2010 was the government’s ability to reduce its domestic debt burden by a massive 25.8%. Domestic debt stands at SR167 billion, or 10.2% of GDP, down from more than 80% in 2003. This demonstrates Saudi Arabia’s fiscal well-being; as debt problems mount in many advanced economies the kingdom has been able to finance a stimulatory spending programme and slash debt. Higher oil revenue and slow growth in imports allowed for a very comfortable current account surplus of SR260.9 billion ($69.6 billion), triple the year earlier.
The 2011 budget demonstrates that the kingdom is dedicated to continuing stimulatory spending to develop the economy and persuade private investors to do the same as they gradually emerge from a phase of deleveraging. A slowdown in the pace of budget growth, however, also signals the state’s goal to rein in overspending and employ more prudent and efficient fiscal policies in the coming years. The private sector is showing signs of a healthy comeback, assisted by the government’s commitment to invest and a guarded pick up in bank credit growth. The break even price for the 2011 budget is estimated at WTI $58 a barrel.
Source: Dr. John Sfakianakis, Chief Economist, Banque Saudi Fransi
Dr. John Sfakianakis – Chief Economist
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