SAMBA’s Chief Economist Looks At Saudi Government Finances

VOL. XLV

No 6

11 February 2002

SAUDI ARABIA

SAMBA’s Chief Economist Looks At Saudi Government Finances

Given the structural change in the national budget of Saudi Arabia whereby the percentage spent on current expenditures has risen to the detriment of capital expenditures, and cumulative deficits have grown as a result of successive annual deficits, “realistically, only the imposition of substantial new domestic taxation and high levels of private sector growth (a tough combination to achieve) will lessen significantly dependence on oil revenues.” So says the latest assessment of the domestic economy, The Saudi Economy In 2002, February 2002, published by Saudi American Bank’s (SAMBA’s) Chief Economist Brad Bourland. The report says privatizations may contribute to revenue sources but they are only “one-time injections” and not a sustainable non-oil revenues source. In addition, it notes that customs duties are “declining in line with tariff reductions and the government’s bid to join the WTO”.

SAMBA says government debt (all of which is domestically owned and riyal denominated), now stands at SR630bn ($171bn) or 99% of 2001 GDP (see Table 1 below). Of this, 19% is owned by the domestic banks, 75% is held by the state pension funds and a small portion by companies and individuals given special bonds by the government to settle late payment obligations. The aggregate total rose by SR11.4bn ($3.04bn) in 2001 “suggesting that the commercial banks financed about half of the 2001 deficit”. SAMBA estimates that financing the 2002 projected deficit need not be problematic “assuming that the commercial banks absorb less than half and the pension funds lend the rest” but notes that future financing of this sort may be threatened by the funding needs of private sector projects. Hence, SAMBA says it is “concerned about the magnitude of government debt, continued substantial budget deficits and declining discretionary spending in the budget”. All three factors lead to a growing allocation of government revenues to debt servicing, increased demands on the banks which squeezes sectoral liquidity, and the loss of flexibility “to add fiscal stimulus to the economy at times of broader economic weakness”.

SAMBA notes that the Saudi Government is strengthened fiscally by its $48.67bn worth of foreign assets (now reported by SAMA on a monthly basis reflecting “improvement in transparency of fiscal data”) and the additional $33.9bn held by the government pension funds that are invested conservatively, yielding on average 6% per year. Collectively these allow for investment income of $1.5bn per year without drawing down on the principal, although SAMBA notes that in years of low oil income such as 1998 and 1999, a portion of the principal was drawn on to meet budgetary needs. Moreover, foreign assets of the government pension funds generally report steady growth and even though in 1999 there was a reported decline, probably due to a “a loan from one of the funds to the government to help with revenues for that year”, in general these assets create a varied source of liquidity for the government and offset any weaknesses in government finance. Asset strength also helps to maintain the fixed exchange rate of the riyal in place since 1986. However, despite this strength, SAMBA points out that it is concerned by the fact that the government enters each oil price downturn with a smaller cushion, noting that net foreign assets of SAMA fell from $56.9bn in1997 to $48.7bn in November 2001.

Table 1

Key Economic Data And Forecasts

($Bn unless noted otherwise)

	1994	1995	1996	1997	1998	1999	2000	2001e	2002f
Nominal GDP (SRBn)	450.03	478.65	529.25	548.44	481.20	535.02	648.96	637.28	618.16
$Bn Equivalent	120.01	127.64	141.13	146.25	128.32	142.67	173.06	169.94	164.84
% Change	1.4	6.4	10.6	3.6	-12.3	11.2	21.3	-1.8	-3.0

Real GDP (% Change)	0.10	0.00	1.40	1.90	1.60	0.40	4.50	1.50	-2.0
Oil	0.20	0.27	2.10	1.40	2.10	-2.40	8.50	-3.60	-7.50
Non-Oil Private Sector	0.70	0.30	1.10	3.60	1.20	2.00	2.50	4.50	4.00
Government	0.00	-0.30	1.30	2.90	0.90	1.70	1.00	1.00	1.00

Unemployment	na	na	na	na	na	na	na	na	na
(% of Saudi Labor Force)

Population (Mn Persons)	18.20	18.80	19.35	20.00	20.67	21.33	22.01	22.71	23.42
Saudi	13.14	13.60	14.08	14.57	15.08	15.66	16.20	16.75	17.32
Non-Saudi	5.06	5.21	5.27	5.43	5.59	5.68	5.80	5.96	6.10

GDP/Capita ($)	6,594	6,789	7,294	7,313	6,208	6,689	7,863	7,483	7,039

Oil Price ($/B)
West Texas Intermediate	17.25	18.30	21.57	21.00	14.00	20.50	30.00	24.30	21.00
Saudi Average	14.50	15.65	19.00	18.25	11.50	17.45	27.00	21.80	18.00

Current Account	-10.40	-5.30	0.70	0.30	-13.10	0.40	15.60	8.30	-7.90
as % of GDP	-8.67	-4.15	0.50	0.21	-10.21	0.28	9.01	4.88	-4.79

Government Budget Balance	-9.28	-7.31	-5.07	-4.21	-12.27	-9.07	6.06	-6.70	-12.00
Revenues	34.40	39.07	47.76	54.80	38.13	39.20	68.82	61.30	41.80
Expenditures	43.68	46.37	52.83	59.01	50.40	48.27	62.76	68.00	53.80
Budget Balance as % of GDP	-7.7	-5.7	-3.6	-2.9	-9.6	-6.4	3.5	-3.9	-7.3

Government Domestic Debt (SR Bn)	342	397	445	477	558	625	616	630	675
as % of GDP	76	83	84	87	116	119	95	99	109

Official Foreign Assets	68.51	67.94	78.04	85.98	78.34	69.35	73.45	82.57	78.50
Central Bank	47.50	46.10	52.08	58.21	46.63	39.01	40.70	48.67	43.00
Government Pension Funds	21.00	21.84	25.96	27.77	31.71	30.34	32.75	33.90	35.50

Cost of Living (% Change)	0.60	4.80	1.30	0.00	-0.20	-1.20	-1.00	-0.80	-0.50

Source: SAMBA estimates for 2001, forecasts for 2002, except government budget figures, which are from Ministry of Finance. Saudi Arabian Monetary Agency, Ministry of Planning Central Department of Statistics, and Ministry of Finance for GDP (1994-2001), population, current account, government budget balance, official foreign assets, and cost of living. US Embassy Riyadh, Saudi Arabia: 2001 Economic Trends, for government domestic debt. SAMBA estimates for unemployment, all years.

Commenting on fiscal policy in the kingdom, SAMBA highlights the now infamous overspend of 18.6% in the 2001 budget leading to a SR25bn deficit ($6.7bn) rather than the projected balanced budget (see Table 2 below), noting that “no detail was provided in the year-end announcement as to where this additional spending occurred.” The report describes the year 2002 budget as “an austerity budget based on a conservative oil prices and revenue assumption” and suggests that the projected 6% reduction in spending compared to the previous year is likely to come in “defense and security since this remains the largest spending category and one where discretionary spending cuts are likely still possible”. (Spending in these two areas has increased steadily in absolute terms in recent years but has fallen as a percentage of the total.) SAMBA says that reduced expenditures “represents a significant fiscal retrenchment, and given the lack of discretionary spending, raises questions as to whether this low spending target can be met.” It concludes that given lower oil production and prices in 2002 compared to 2001, “neither government spending nor oil revenues will be drivers of broad economic growth,” with that burden falling to the private sector, adding impetus for economic reform and further liberalization. (For the full text of SAMBA’s analysis of Saudi demographics and employment see D Section.)

Table 2

Fiscal Strength Indicators

	2000	2000e	2002f
	%
Budget Balance
Deficit/GDP	0.0	3.9	7.1
Non-Budgeted Exp/Non-Budgeted Rev	49.8	266.7	n.a

Structure of Expenditures
Interest Payments/Total Expenditures	13.6	12.6	14.6
Interest Payments/Oil Revenues	14.9	17.1	29.2
Actual Exp/Budgeted Exp	127.0	118.6	110.1
Current Expenditures/Total Expenditures	88.5	90.0	95.0

Structure of Revenues
Oil Revenues/Total Revenues	83.0	81.0	74.0
Actual Revenues/Budgeted Revenues	154.0	107.0	100.0

Structure of Debt
Debt/GDP	96.0	102.0	107.0
Foreign Debt/Total Debt	0.0	0.0	0.0
Short-Term Debt/Long-Term Debt	2.0	1.9	1.7
Foreign Debt/Foreign Assets	0.0	0.0	0.0