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 2006 2007 2008 2009* 2010e
Real GDP (%) 6.1 3.2 3.4 4.5 0.1 3.8
Hydrocarbon 7.8 -0.8 0.5 5.0 -5.9 4.3
Non-hydrocarbon 5.2 5.1 4.7 4.3 3.0 3.6
Nominal GDP (%) 23.6 13.0 7.1 21.9 -22.0 12.5
Inflation (%) 0.7 2.4 4.0 9.9 4.4 5.0
Current account balance (% of GDP) 29.3 27.8 24.9 29.2 5.5 0.7
Chief Economist Fiscal balance (% of GDP) 18 21.2 12.4 34.1 -3.3 5.5
Dr Jarmo T. Kotilaine
j.kotilaine@ncbc.com Source: SAMA, NCBC Research estimates; *Provisional numbers from Saudi Ministry of Finance

Please refer to the last

page for important
information
 SAUDI ARABIA BUDGET 2010

its Specialized Credit Institutions including the Real

Budget summary Estate Development Fund, the Saudi Industrial

Development Fund, the Saudi Credit and Saving
The 2010 budget underscores the government’s
Bank, the Agricultural Development Fund, the Public
continued determination to support economic activity
Investment Fund, and the Government Lending
despite initial signs of a global recovery. It further
Program.
highlights the strong focus on economic diversification
as spending on physical and social infrastructure has Performance of the economy
been further enhanced.
exceeded expectations in 2009
This ambitious agenda will be pursued from a position Saudi Arabia’s real GDP growth has averaged 4.0%
of relative fiscal strength in spite of the ongoing since the beginning of this decade. Although a small
global crisis. The government now projects revenues contraction in real terms was widely expected this
of SAR470bn in 2010, 14.6% higher than the 2009 year, the provisional estimates from the Ministry of
budgeted figure of SAR410bn but 6.9% lower than Finance point to modest real growth of 0.15% in
the actual revenues of SAR505bn. The budget 2009, underscoring the resilience of the economy in
foresees government spending of SAR540bn, 13.7% the face of adversity.
higher than 2009 budgeted expenditure of SAR475bn
Exhibit 2: Saudi Arabian GDP growth
and 1.8% lower than the 2009 actual expenditure
500 6.0%
(SAR550bn). These figures would imply a continued 5.0%
400
budget deficit of SAR70bn. However, a series of 4.0%
300
3.0%
surpluses since 2002 has positioned the Kingdom well 200
2.0%
for an expansionary fiscal stance even in the face of 100 1.0%
unusually elevated economic uncertainties. 0 0.0%
Average 2005 2006 2007 2008 2009
A remarkable 40% of the total projected government 2000-04
GDP (USD bn) Real grow th (%)
spending – or some SAR260bn – is directed towards
capital investment projects, underscoring the
Source: SAMA, NCBC Research
authorities’ determination to upgrade critical
infrastructure and to boost the non-oil sector. Strongly supported by the government’s
Spending on education and training has been boosted diversification initiatives, the non-oil GDP has been
to SAR137.6bn, or over 25% of the total. New the main driver of Saudi growth in recent years. This
projects in the education space include the pattern was even more pronounced during a year
construction of 1,200 new schools and the when the hydrocarbons sector underwent a
rehabilitation of 2,000 existing school buildings. contraction but the non-oil sectors of the economy
Healthcare and social services have been allotted recorded solid growth of 3.0%. Highlighting the
SAR61.2bn (11% of the spending), to be used among importance of stimulus spending, the government
other things to build 92 new hospitals with a capacity sector grew by 4.0% while the private sector
of 17,150 beds and new primary care centers. expanded by 2.5% in 2009.

The government also announced higher spending on Exhibit 3: Oil and non-oil GDP growth
physical infrastructure in the form of some 8.0%
6.0%
SAR23.9bn to be spent on road construction, ports, 4.0%
2.0%
airports, railways and new postal services. The
0.0%
government plans to spend SAR46.0bn – or 8.5% of -2.0%
-4.0%
the total – In the water, agriculture and infrastructure -6.0%
-8.0%
areas. Spending priorities include new water sources Average 2005 2006 2007 2008 2009
and improved water and sewage networks. 2000-04
Oil GDP grow th (%) Non-oil GDP grow th (%)

In further stimulus spending, the government intends

to provide some SAR48.3bn worth of loans through Source: SAMA, NCBC Research

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 SAUDI ARABIA BUDGET 2010

Higher oil prices and rapid economic growth have government authorities comfortable with the current
allowed Saudi Arabia to register huge current account oil price and OPEC quotas expected to increase only
and fiscal surpluses in recent years. However, the marginally, we expect oil-sector GDP growth of 4.3%
global economic turmoil and the decline in oil prices in 2010e in a sharp reversal of this year’s contraction.
led to their sharp erosion in 2009. According to the
As the value of exports is likely to recover smartly in
Saudi Arabian Monetary Agency (SAMA), the
2010, in line with our assumption of average oil
Kingdom’s current account surplus declined by
prices at USD73 per barrel, we forecast 2010e surplus
84.5%, from SAR496.2bn (or 28.6% of GDP) in 2008
to stand at around SAR80bn as compared to the
to SAR76.7bn (5.5% of GDP) in 2009.
current government forecast of a deficit of SAR70bn.
Exhibit 4: Fiscal & current account balance (% of However, likely above-budget government spending
GDP) in line with recent years remains a source of
35% uncertainty.
30%
25%
20% Exhibit 5: KSA crude oil production and exports
15%
10% 10
5%
0% 8
-5%
6
-10%
Average 2005 2006 2007 2008 2009 4
2000-04
Fiscal balance Current account balance 2

0
Average 2005 2006 2007 2008
Source: SAMA, NCBC Research 2000-04
Crude oil production (mbpd) Crude oil exports (mbpd)

Foreign exchange reserves and

government debt during 2009 Source: SAMA, NCBC Research

Saudi Arabia has ramped up its crude oil production

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 USD75-
80 per barrel – SAMA has been reporting increases in
the net foreign assets to SAR1,459bn at the end of
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% 25.0%
10.0%
8.0%
20.0%

October 2009. 6.0% 15.0%

4.0% 10.0%
2.0%
The 22.0% decline in nominal GDP to SAR1,384bn in 0.0%
5.0%

2009 had a negative impact on the country’s public -2.0% 0.0%

Average 2005 2006 2007 2008 2009
sector indebtedness in a marked reversal of recent 2000-04

trends. Government debt as a proportion of GDP CPI inflation (LHS) Broad money grow th (RHS)

increased marginally from 13.5% in 2008 to 16.0% in

2009. Source: SAMA, NCBC Research

The easy money policy of the last few years, with

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
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

22 December 2009 3
 SAUDI ARABIA BUDGET 2010

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.

Outlook
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 4
 SAUDI ARABIA BUDGET 2010

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22 December 2009