Saudi Arabia has posted a large budget surplus of SR306 billion despite sharp jump in expenditure in 2011. Revenue reached to SR1.11 trillion and expenditure touched SR804 billion in the year.

Government proposed an increase in both revenue and expenditure in 2012 compared to what was estimated for the current year. It estimates real GDP growth at 6.8 percent and nominal GDP growth at 28 percent for the year 2011. Trade surplus is estimated to have reached record level of SR915 billion whereas current account surplus touched SR598 billion in 2011.

Public debt has been estimated to come down to just SR135.5 billion, 6.3 percent of GDP in 2011. On the other side, inflation eased a bit whereas broader money supply growth accelerated in November, according to a Al-Rajhi Capital report “Saudi Economy: Robust Growth and Record Budget” released by the Research Department on Saturday.

Fiscal performance

Ministry of Finance in Saudi Arabia presented the national budget in which it projected the government revenue to be SR702 billion and expenditure to be SR690 billion for the year 2012. The actual revenue and expenditure for the year 2011 has been estimated at SR1.11 trillion and SR804 billion creating a surplus of SR306 billion. In addition to the government finance, the ministry has put forward real GDP growth estimates at 6.8 percent for the year 2011. In nominal terms GDP is estimated to have grown by 28 percent. Trade surplus has been estimated to be at a record level at SR915 billion whereas current account to be at SR598 billion.

Budget for 2012

The government has budgeted total revenue of SR702 billion and total expenditure of SR690 billion resulting into a budget surplus of SR12 billion for the year 2012. In the statement accompanied the budget government envisages the focus of the national budget remains on the development process and ensuring the investment programs remain conducive to strong and sustainable growth. The budget puts emphasis on employment opportunities and job creation along with focus on education, healthcare and social services.

Expectation

In line with the government budget, Al-Rajhi Capital expects decline in both revenue and expenditure in 2012 compared to 2011 mainly on account of expected decline in oil sector and one time expenditure incurred by the government this year. Total revenue is expected to decline from an estimated level of SR1110 billion in 2011 to SR890 billion in 2012 mainly due to expected decline in oil revenue. Total expenditure is also expected to decline from an estimated level of SR804 billion in 2011 to SR746 billion in 2012 mainly due to decline in the current expenditure from SR604 billion to SR512 billion. Therefore, fiscal surplus is also expected to shrink to SR144 billion next year.

The expectation of lower revenue is based on belief that average oil prices is going to be lower at $ 95 per barrel as well as oil production in Saudi Arabia. On expenditure side, expenditure in 2012 to be lower because of one-time expenditures such as 2-months bonus to public sector employees, capitalization of Real Estate Development Fund and Saudi Credit and Saving Bank are not going to be there. These items have been estimated to cost the government almost SR90 billion-100 billion in 2011.

Moreover, re-current expenditures are likely to continue to rise due to increase in minimum wages, social security such as unemployment allowance etc and hiring 60,000 at Ministry of Interior.

Capital expenditures, particularly related to housing, are expected to pick up this year. This is likely to be the main priority for this year’s budget. Allocation to building and expansion of hospitals will be another important focus for the budget.

Comparison

The oil boom during 1970s and 2000s (especially since 2003) provided government with much higher revenue than in 1980s and 1990s. During 1970s and 2000s, government budget was largely in surplus. However, the magnitude of oil boom of these two decades was quite different from government budget point of view. Economic growth was unprecedented resulting into multiple times rise in government revenue and expenditure in 1970s. Although economic growth and rise in government revenue was robust during 2000s, it could best be described as muted when compared to 1970s growth, the report said.

The average annual growth in nominal GDP was 44.3 percent on the back of sharp rise in crude production and oil price during 1971-80. Crude production increased from 4.77 mbpd in 1971 to 9.9 mbpd in 1980 even as crude price jumped from $ 1.65 per barrel to $ 28.67 per barrel during the period. This translates into the fact that crude production almost doubled and crude price increased slightly by more than 17 times. The average annual growth of crude production was 11 percent punctuated by decline in only 1975 and 1978. On the other hand the average annual growth in nominal GDP was just 9.6 percent and average annual oil price rise was 14.1 percent during 2001-10. Average crude production during the decade was 8.54 mbpd. Average annual growth of crude production was just 1 percent filled with decline in 2001, 2002, 2006, 2007 and 2009.

The sharp difference in movement of macroeconomic variables during 1970s and 2000s was also reflected in the government budget. Government revenue increased at an average rate of 50.2 percent annually during 1970s whereas average annual growth in government expenditure at 48.3 percent closely followed the revenue growth during the period. Fiscal surplus averaged at 14.3 percent of GDP annually during the same period. On the other hand, average annual growth in revenue was 17.5 percent and expenditure was 11 percent during 2000s. Fiscal surplus was on an average 9.2 percent of GDP annually during this period.

Growth in constituents of government revenue and expenditure has also been markedly different. Growth rates of oil and other revenues were not much different during 1970s even as growth in current and capital expenditure was also quite close. Average annual growth in oil revenue and other revenue were 56.3 percent and 47.2 percent respectively during the period. On the expenditure side, current and capital expenditure grew at average rates of 47.7 percent and 51.8 percent respectively. Average share of capital expenditure in total expenditure was almost half. However, these rates diverged significantly in 2000s. Average annual growth in oil revenue was 19.7 percent whereas it was just 7.4 percent for other revenues. Similarly, there was large divergence between current and capital expenditure where the previous grew at an average annual rate of 7.9 percent and later grew at 29.6 percent. Even though capital expenditure increased much faster compared to current expenditure, average share of capital expenditure was 19.9 percent during the period.

From fiscal perspective, Al-Rajhi Capital said the comparison of above two decades suggests that though two periods were starkly different quantitatively, they were different qualitatively as well. Although share of oil revenue in total revenue was higher during 1970s, growth in revenue was more balanced as growth in oil and other revenues was similar. However, focus of the expenditure during 2000s has been on creating more productive capacity in the economy as capital expenditure growth was much higher compared to growth in current expenditure. Moreover, another remarkable achievement during 2000s has been sharp reduction in public debt to negligible (10.2 percent of GDP in 2010) and foreign exchange reserves soared to more than 100 percent of GDP.

Inflation

Although headline inflation seems to have remained at 5.2 percent year-on-year in November, the same level as in October, looking at two decimal points provides slightly different picture. It shows that inflation has eased almost one-tenth of a percent from 5.25 percent year-on-year in October to 5.16 percent year-on-year in November. On the monthly basis, it declined from 0.5 percent in October to 0.2 percent in November. This suggests that the pace of inflation has moderated in the last month.

The growth in inflation components has been mixed. On the one hand food inflation has accelerated to 4.2 percent year-on-year in November from 3.2 percent year-on-year in October. However, it remains at almost two-year low even after 1 percent rise. Home furniture inflation also accelerated to 2.9 percent year-on-year from 2.5 percent year-on-year during the same period. Rent component remained flat at 8 percent year-on-year in the last month. On the other hand, other expenses and services eased from high rate of 12.3 percent year-on-year in October to 9.4 percent year-on-year in November.

Money supply growth

The Al-Rajhi Capital report said measures of money supply witnessed a moderate acceleration in October. Growth rate of M1 accelerated marginally to 23.5 percent year-on-year in October compared to 22.9 percent year-on-year in September. The acceleration was mainly due to faster growth in currency outside bank whereas growth in demand deposit was almost flat at 22.6 percent year-on-year in October. Growth rate of M2 which includes M1 and “time and savings” deposits accelerated to 15.8 percent year-on-year in October mainly on account of smaller decline in time and savings deposits. Note that time and savings deposits declined by 0.5 percent year-on-year in October compared to a decline of 2.9 percent year-on-year in the previous month.

Growth rate in M3, the broader measure of money supply, jumped from 11.9 percent year-on-year in September to 14.4 percent year-on-year in October. The higher jump in growth rate of M3 compared to growth rates of other measures of money supply is due to jump in “other quasi monetary” deposits. The deposits jumped from -1.0 percent year-on-year in September to 7.1 percent year-on-year in October.

The average growth in money supply in the first ten months of the current year has been higher than the rates in 2010. Average growth rate in M1 has been 24.8 percent in 2011 (Jan-Oct) compared to 19.9 percent in 2010. M2 has grown at an average rate of 14.7 percent in 2011 (January-October) compared to 9.3 percent in 2010. Finally, M3 average growth has been 13.1 percent this year compared to just 5 percent in the previous year.

Credit growth

Credit growth to private sector by commercial banks accelerated to the highest level in October this year. Loans, advances and overdrafts increased by 10 percent year-on-year in October, highest in 2011. Banks’ total claims on private sector which includes loans, advances, overdrafts, bill discounted and investments in private securities increased by 9.8 percent year-on-year in the month.

The growth rate of private sector lending by commercial banks has been better in 2011 as average growth in loans, advances and overdrafts (direct lending) has been 7.6 percent in January-October period compared to 4.7 percent for the entire 2010. Similarly, growth in bank’s total claims on private sector has averaged at 7.8 percent in January-October 2011 compared to 5.7 percent in 2010.

SAMA assets

Total reserve assets of Saudi Arabian Monetary Agency (SAMA) continued to grow in October though at slightly lower pace. Total reserve assets reached SR1.97 trillion ($ 525 billion) in October which was higher by 21 percent compared to October 2010. Growth in September was 22.7 percent year-on-year. Reserve position in the IMF jumped 129 percent year-on-year in October though it grew just 1.6 percent on monthly basis. Two large components of the total assets, foreign currency and deposits abroad and investment in foreign securities, increased 21 percent year-on-year.

Reserve assets have increased from SR1.67 trillion at the end of 2010 to SR1.97 trillion at the end of October 2011, an increase of SR301 billion in 10 months compared to just SR131 billion increase in the entire 2010.