Budget for 2012 Reviewed: Jadwa

Published: December 28, 2011

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Editor’s Note:

The Saudi Arabian budget for 2012, released Monday, contains a 19 percent increase over the amount budgeted for 2011 according to Jadwa Investment, as reported by Arab News today.  The Jadwa report was a comprehensive review of the budget details and a general economic outlook for 2012.  Among the highlights from the 2012 budget report: total expenditure of SR690 billion ($183.9 billion); 24 percent is set for education and the largest sector increases are in transportation, health and social affairs; revenue is forecast to grow by 30 percent (suggesting a less conservative oil price assumption than in the past); the surplus forecast is SR91 billion ($24.2 billion). The report also provided other key performance data, such as: 2011 real GDP rose 6.8 percent up from 4.1 in 2010 (2012 growth is forecast to slip to 2.7 percent); 2011 nonoil private sector growth hit 8.3 percent with manufacturing alone up 15 percent; inflation in the Kingdom averaged 4.9 percent over the first eleven months of 2011; and the current account surplus hit a new all-time high of SR598 billion ($159.4 billion).

Today we provide the Arab News report of the Jadwa budget discussion for your consideration along with presentations from the recent US-Saudi Business Opportunities Forum which put discussion of the Saudi economy in context. These include: remarks by Ahmed al-Khateeb, Managing Director & CEO, Jadwa Investment; and Ahmed A. Alkholifey, Executive Director for Saudi Arabia at the International Monetary Fund, from a panel titled, “Finance and Investment in Saudi Arabia: The Role of Fiscal Policy” (Video and Slides).  You will also find the Forum remarks of Dr. Muhammed Al-Jasser who spoke on financial policy challenges, regulatory reforms, issues of the reserve currency and Saudi Arabia’s experience in preserving stability for “safeguarding the home front.” Dr. Al-Jasser spoke at the Forum in his role as Governor of the Saudi Arabia Monetary Agency but within a week of that appearance he was named as the next Minister of Economy and Planning for Saudi Arabia.


Kingdom needs $74 a barrel oil price to balance budget: Jadwa

JEDDAH: Saudi Arabia’s budgeted spending is at another all-time high in 2012, as the government continues with its program to upgrade the human and physical infrastructure. There is a large jump in projected revenue. With no new initiatives announced, this is a sign that the government has become less conservative with its oil price assumption. For the first time since 2008, the Kingdom has budgeted for a surplus. In the US and across Europe, countries are cutting spending to bring budget deficits under control and reduce their debt. This is not a concern for the Kingdom. While the planned surplus is small, debt is very low and should a deficit occur it can be financed comfortably by drawing on the vast stock of foreign assets rather than issuing new debt. Jadwa Investment said in its report on Saudi Arabia’s budget which was announced on Monday.


Total expenditure is budgeted at SR690 billion in 2012. This is a 19 percent increase on the figure budgeted for 2011, making it the highest annual growth in budgeted spending since 2006. Spending on the SR250 billion government program to build 500,000 housing units over an unspecified period was not included in the budget. Instead, SR250 billion of the 2011 budget surplus has been deposited in a special account at SAMA (Saudi Arabian Monetary Agency) to fund the program.

Budgeted spending is some way below the actual level in 2011. This is not a concern. It is normal for the government to exceed the spending projection outlined in the budget and therefore for the budgeted total to be below the actual total for the previous year. The last year that budgeted spending was greater than actual spending in the previous year was 2000. That said, the difference between the level of expenditure budgeted for 2012 and the actual level of spending in 2011 was 14 percent, compared to an average of 9 percent over the previous decade, the Jadwa report said.

This divergence is because of the one-time nature of some of the payments made in 2011. Payments totaling almost SR100 billion, in the form of a two-month salary bonus for government employees and transfers to the Real Estate Development Fund and Saudi Credit Bank, will not be repeated in 2012. Nonetheless, elements of the supplemental spending packages will impact on expenditure in 2012. The increase in the minimum wage will add around a further SR3 billion to spending in 2012 (most of this extra cost was in 2011). Payment of the unemployment benefit, which will begin in January (rather than November 2011, as previously planned) will add around SR1 billion per month to government spending.

Budgeted investment spending has been raised to SR265 billion. Spending priorities are consistent with recent years. Education is allocated the biggest share of those departments disclosed in the budget, at 24 percent of total spending. Transport and health and social affairs received the largest increase in their allocations.

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Total revenue is budgeted at SR702 billion. Jadwa anticipates that around 85 percent of total revenue will come from oil. The report said oil production of 8.8 million barrels per day at a price for Saudi export crude of $69 per barrel (equivalent to around $65 per barrel for WTI and $73 for Brent) is consistent with the oil revenue projection in the budget.

Nonetheless, the jump in budgeted revenue suggests that the government has been less conservative with its oil price assumption for 2012. Revenues are projected to rise by 30 percent.

Projections for nonoil revenues were not published. Fees and charges for government services and customs tariffs are the main sources of non-oil revenues. Although government foreign assets are at an all-time high, revenues earned from investment income are unlikely to rise too much because of the exceptionally low interest rates on US government bonds, which constitute the bulk of Saudi government foreign assets. No new policies to raise nonoil revenues were contained in the budget.

Budget forecast

Jadwa forecasts a budget surplus of SR91 billion in 2012, equivalent to 4.5 percent of expected GDP. This is because the oil price is expected to be higher than that used in the budget and therefore that oil revenues will exceed the budgeted total. Jadwa forecasts total oil revenues to the budget at SR744 billion and nonoil revenues at SR80 billion.

Spending will be above the budgeted level. Over the last 10 years actual government spending has averaged 24 percent higher than the budgeted amount. The extent of overspending was much greater than this in 2011, at 39 percent. Jadwa expects that the Kingdom’s excess spending will be more in line with the historical trend and forecasts total expenditure of SR733 billion.

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The oil price level necessary for revenues to balance government spending, known as the breakeven price, is $74 per barrel for Saudi export crude. This is based on our production assumption of 8.8 million barrels per day and domestic consumption of 2.4 million barrels per day. Output from the Karan gas field, which began in July, has dampened the impact of rising domestic energy consumption on domestic oil demand. With output from Karan not reaching full capacity until 2013, this gas should take some of the burden from oil as the fuel for domestic energy consumption in 2012, the Jadwa report said.

The budget surplus widened in 2011. At SR306 billion, the surplus was the second highest on record. It was the equivalent of 14.1 percent of GDP. Higher oil revenues, the result of around a 35 percent increase in average oil prices and growth in production of 13 percent (with exports around 19 percent higher), were the reason for the larger surplus. Spending was well in excess of the budgeted projection, but this was outweighed by the increase in oil revenues.

Revenue totaled SR1.11 trillion, an all-time high. It was 104 percent above the budgeted level and 50 percent greater than in 2010, due to higher than budgeted oil prices and production. Jadwa estimated that the 2011 budget was based on a price for Saudi oil of $56 per barrel and production of 8.3 million barrels per day. With a few days of the year left, it seems likely that the actual price of Saudi oil will average $105 per barrel. Production will be around 9.3 million barrels per day, after it was raised to compensate for the shortfall from Libya. Nonoil revenues were SR78 billion, up around 10 percent on the 2010 total.

Expenditure amounted to SR804 billion, 39 percent above the budgeted level and 25 percent higher than in 2010. The annual increase was the highest since 2000 and compares to an average over the past decade of 13 percent. This was caused by payments contained in the supplemental spending packages announced in the first quarter. The largest of these was the additional two-month salary bonus for government employees, which cost SR35-SR40 billion. In addition, SR40 billion was transferred to the Real Estate Development Fund and SR20 billion to the Saudi Credit Bank. While the bulk of this SR60 billion has not been spent, it has moved from the accounts of the government to those of the specific agencies, meaning that the full amount is recorded as government spending.

Commitments in the supplementary spending packages announced in February and March also added to the wage bill; especially the increase in the public-sector minimum wage and the recruitment of 60,000 new staff at the Ministry of Interior.

Total outstanding government debt was projected to fall to SR135.5 billion by the end of 2011, equivalent to just 6.3 percent of GDP. Commercial bank holdings of government and quasi-government debt securities have risen by SR20.6 billion over the first 10 months of this year, owing to a SR34.9 billion increase in Treasury bills, which have been used to absorb the liquidity generated by high government spending. Bank holdings of longer-term government bonds are down by SR14.2 billion to SR47.7 billion, the lowest level since mid-2006.

Economic performance

The budget contained preliminary macroeconomic data for 2011. This showed that economic performance was very strong. Nonoil economic growth was well above forecast, with nonoil private sector growth the highest since the early 1980s. Higher oil revenues caused substantial growth in nominal GDP and the current account surplus. Inflation declined.

Real GDP growth rose to 6.8 percent, the fastest rate since 2003, from 4.1 percent in 2010. However, the oil sector grew by just 4.3 percent.

The nonoil private sector grew by 8.3 percent. However, some of the sectoral growth rates were way above what Jadwa had forecast. Three sectors grew at double digit rates: Manufacturing (15 percent), construction (11.6 percent) and transport and communications (10.1 percent). These growth rates are very high on an historical basis and inconsistent with monthly data such as volumes of petrochemical exports and cement sales. Growth in other sectors was more in line with expectations, with retail at 6.4 percent, electricity, gas and water at 4.2 percent and finance at 2.7 percent.

Nominal GDP expanded by 28 percent, the fastest rate since 1980. The rise was because oil revenues were higher than they were in 2010, with both prices and production up. At SR2.16 trillion, the economy is the largest it has ever been. According to IMF projections, this ranks the Kingdom as the twenty-first largest economy in the world, between Sweden and Poland.

Inflation was put at an average of 4.9 percent, compared to 5.3 percent in 2010. There is a tendency for the inflation data to be presented in the budget to be out of line with that produced on a monthly basis by the Central Department of Statistics, but in 2011 the data is much closer. According to the Central Department of Statistics inflation averaged 4.9 percent over the first eleven months of 2011. The slight fall in inflation in 2011 was because of lower food price and rental inflation. The surge in consumer spending resulting from the bonus for public-sector works has fed into inflation, but given the extent of the spending, the rise in inflation from areas such as education and entertainment and transport and telecoms has been fairly modest. Another measure of inflation, the nonoil GDP deflator rose to 6.1 percent from 1.5 percent in 2010. This was the highest level since 1991, and almost double the reading when consumer price inflation peaked in 2008.

The current account surplus hit a new all-time high of SR598 billion, up from SR250 billion in 2010. Higher oil prices and production raised oil revenues to SR1.13 trillion, 88 percent of total export revenues. Nonoil exports rose by 14 percent, a fairly sluggish rate given the increase in petrochemical prices during the year. Imports were up by only 2 percent, broadly in line with the monthly trade data.

Outlook for 2012

Jadwa expects 2012 to be a reasonable year for the economy. While economic growth will slow, this will be due to lower oil production. Greater execution of government investment projects, especially in the housing sector, means that nonoil growth should strengthen. Bank lending will remain supportive and regional unrest will be less of a drag. Inflation should be down a little as domestic spending pressures recede and external pressures stay subdued. Oil prices are expected to fall as the weak global economy slows demand growth and rising output from Libya and Iraq boosts supply.

Economic growth in Saudi Arabia is forecast to fall to 2.7 percent in 2012, owing to lower oil production. Growth in the nonoil sectors will pick up. High government spending will continue to be the engine of the nonoil economy, supported by greater bank lending. Utilities and construction, the main beneficiaries of government spending, are expected to be the fastest growing sectors of the economy.

Inflation is expected to fall to an average of 4.4 percent owing to a fall in price pressures from outside of the Kingdom.

“We do not foresee any changes to the riyal’s peg to the dollar. Lower oil revenues will cause the current account surplus to ease, though it will remain substantial, at over 15 percent of GDP,” Jadwa said in its report.

Source: Arab News


About Jadwa Investment – Jadwa Investment is a Saudi Closed Joint Stock company operating under the supervision of the Saudi Arabian Capital Markets Authority (CMA). Under the CMA decision published on August 21, 2006, Jadwa was awarded a license to offer all types of investment services including dealing, managing, custody, arranging and advising. All investment services offered by Jadwa Investment are supervised by a Shariah Supervisory Board and are fully Shariah-compliant.


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