An expansionary 2013 budget based on a conservative oil price will support another year of healthy economic growth for Saudi Arabia and a further strengthening of the sovereign’s net creditor position, according to Fitch Ratings.
However, it added, overall growth will slow due to a decline in oil production that was already evident in recent months.
The FY13 (31 December 2012 to 30 December 2013) budget unveiled on December 29 projects record spending of USD219bn (34% of GDP), up by almost 20% on the 2012 budget. Budgeted capital spending is 28% higher than in 2012, though the government has struggled to achieve its capital spending targets in recent years. Education and healthcare remain the focus of spending, accounting for 37% of the total. Defence and security tends to be the largest single item, constituting around one-third, but is not disclosed in the budget.
Revenues are based on unstated oil price and production assumptions, with the former well below prevailing market prices. An 18% jump in revenues is projected. With no new revenue-raising measures announced and little scope for higher oil revenues (Fitch anticipates Saudi production and prices will be lower in 2013 than 2012), the revenue projection appears less cautious than usual. However, actual revenues generally substantially exceed budget revenues (by an average of 82% over the past five years) and should do so again in 2013.
A $2.4bn (0.4% of GDP) surplus is budgeted for 2013. Fitch expects a larger surplus, of 7.6% of GDP. The budget is consistent with an oil price (Brent) of around $60/b and production of 9.7 million barrels per day, compared with Fitch’s forecast of an average $100 per barrel for Brent.
Spending is also expected to surpass the budgeted level; actual spending has exceeded budget by an average of 24% over the past decade. With pension funds expected to post modest surpluses, the general government surplus is forecast at 8.3% of GDP.
Fiscal performance in 2012 was strong. The central government surplus rose to 14.2% of GDP, as greater oil production and high oil prices pushed total revenues to an all-time high. Spending growth slowed to 3%, the lowest since 2002, though this followed a significant one-off spending package in 2011. In absolute terms spending is up by 43% since 2009.
Central government gross debt fell to 3.6% of GDP at the end of 2012. With government deposits at the central bank rising in 2012 (data is available to end-October), Fitch estimates that the general government was a net creditor by 65% of GDP, compared with an ‘AA’ median net debt position of 5% of GDP.
Although the fiscal position is exceptionally strong, it is heavily dependent on oil revenues (around 90% of total revenues) and the breakeven oil price needed to balance revenues with actual spending has risen in recent years. Fitch projects that the breakeven oil price will rise to $74/b in 2013 (assuming oil production of 9.7 million b/d) up from USD68/b in 2012 and just over $40/b in 2008.
The budget statement provided the first official estimate of full year economic data for 2012. Real GDP growth was 6.8%, down from a revised 8.5% in 2011. Although a breakdown was not available, it appears this moderation was due to slower growth in the oil sector. Non-oil private sector growth was a robust 7.5%, lifting the five-year average to 5.7%.
Government spending has been the main impetus behind the strength of the private sector (construction was the fastest growing sector in 2012) and with policy remaining expansionary in 2013, further healthy private sector growth is anticipated. Bank lending and strong consumer and corporate confidence should also support the private sector. Overall growth will slow, however, due to a decline in oil production that was already evident in recent months.