FALCOM ECONOMIC RESEARCH Snehdeep Fulzele Head of Research +966 1 211 8455 Snehdeep.fulzele@falcom.com.sa FALCOM Financial Services P. O. Box 884 Riyadh 11421 Kingdom of Saudi Arabia Saudi Budget 2010 December 27, 2009
2009
Contents Budget Highlights... 2 Budget Review... 3 Domestic Spending has Sovereign Guarantee... 4 Clouds of uncertainty disbursed in 2009... 5 Estimates prove conservative Deficit is not a worry Nominal GDP down, real slightly up Public debt is marginally reduced Oil adds brightest color to the rainbow... 6 Future outlook Rainbow on the horizon... 7 FALCOM RESEARCH Saudi Budget 2010 Page 1
Budget Highlights Highest ever budgetary allocation for seventh year in a row Highest Budget for 7 th Consecutive year (SR million) 540,000 475,000 335,000 380,000 410,000 181,000 196,000 165,000 185,000 215,000 202,000 209,000 230,000 280,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Targeted expenditure of SR 540 billion (USD 144 billion) up 14% year on year Estimates of SR 470 billion (USD 125.3 billion) revenue to lead to a deficit of SR 70 billion (USD 18.7 billion), more than previous year Provision for investment projects up 16% year on year to SR 260 billion Education & Training gets the largest allocation of SR 137.6 billion, more than quarter of the total budget Health & Social affairs is second highest priority with SR 61.2 billion or over 11% of the budgetary allocation followed by Specialized Credit Development Institutions that are expected to disburse SR 48.3 billion. Institutions have distributed over SR 388.4 billion in the past. Actual deficit for 2009 at SR 45 billion (USD 12 billion) is less than the budgeted deficit of SR 65 billion (USD 17.3 billion) Revenues for 2009 at SR 505 billion down 54% from previous year Nominal GDP for 2009 expected to be SR 1,384.4 billion down from SR 1,758 billion in 2008. Real GDP to grow marginally by 0.15% All components of the GDP recorded positive growth in 2009 except oil sector Education & Training, SR 25.5 How every SR 100 will be spent? Municipality Services, SR 4.0 Health and Social Affairs, SR 11.3 Transport & Telecomunication, SR 4.4 Other Sectors, SR 37.3 Water, Agriculture & Infrastructure, SR 8.5 Specialized Credit development institutions, SR 8.9 FALCOM RESEARCH Saudi Budget 2010 Page 2
Budget Review Conservative estimates and low key affair once again marked the release of Government Budget for 2010. Saudi Arabia has always maintained a dignified silence over important issues preferring to let actions speak. For the seventh consecutive year, the Kingdom released highest ever budget. It plans to spend SR 540 billion as against expectations of SR 470 billion revenues for 2010. Thus a deficit of SR 70 billion is targeted which is more than the deficit of SR 65 billion planned last year. Government expects 2009 to close with deficit of SR 45 billion with SR 505 billion revenue and SR 550 billion expenditure. This will be the first actual deficit since 2002. In 2008, Kingdom had achieved whopping actual surplus of SR 590 billion on the back of run away oil prices in first half. Actual deficit/ Surplus (SR million) 590,000 280,360 (15,772) (48,452) (36,387) (26,981) (20,500) (45,000) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Once again, Government has assumed reins in its hands by taking expansionary route to growth. Balancing the investment requirements for future rewards so as to equip young generation with world class education and generate employment opportunities seem to be the priority of the Government. Education & Training has therefore got the maximum allocation of SR 137.6 billion accounting for 25% of the total budget. This is not surprising as in recent years Government focus has been on education, health and infrastructure. The trend is maintained in 2010 budget. Budgetary Allocation to Sectors (SR in billion) 2010 YoY change % of total Education & Training 137.6 13% 25.5% Health and Social Affairs 61.2 17% 11.3% Municipality Services 21.7 15% 4.0% Transport & Telecommunication 23.9 24% 4.4% Water, Agriculture & Infrastructure 46 30% 8.5% Specialized Credit development institutions 48.3 8.9% Other Sectors 201.3 37.3% Total Expenditure 540 (Source: Ministry of Finance) Revenue estimates are moderate. For eleven successive years, actual revenues have come in above the budgeted. Clearly Government would rather err on the side of conservatism than receive a negative jolt. FALCOM RESEARCH Saudi Budget 2010 Page 3
Domestic Spending has Sovereign Guarantee Government is leading by example. Tentativeness of the past shaped by lower oil prices is replaced by confidence. Every year, it is spending more than the previous year. From 2003 to 2008, year on year growth was in double digits. This growth in 2009 dropped to single digit because of higher spending in 2008. Increases in actual over budgeted expenditures in 2009 reflect increases in expenditures on projects in the Two Holy Mosques and other Mashair, food and welfare subsidies, transfer of temporary to permanent employment, and increases in student enrollments in universities as well as scholarships abroad program. For the 11 th consecutive year, Government has spent more than the budgeted amount. Close to 90% of the total revenues accrue from oil which is volatile commodity traded in the international markets. It is difficult to predict crude oil prices for following year during budgetary exercise. Track record shows Government has always been conservative in assumptions. Depending on the crude market, estimates are revised and expenses are adjusted. We believe trend of spending more than the budgeted amount will therefore continue. 30% 25% 20% 15% 10% 5% 0% 5% 30% 25% 20% 15% 10% 5% 0% 5% 10% 15% 8% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YoY Spending is growing Actual spending more than the budgeted 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 As against SR 510 billion actual spending in 2008, SR 550 billion were spent in 2009. But this has to be looked at in the backdrop of bullish oil market of 2008 that yielded massive SR 1.1 trillion revenue which was not the case in the current year with comparatively much lower revenues of SR 505 billion that would leave a hole of SR 45 billion in Government reserves. For 2010, actual expenditure is once again expected to be more than the budgeted amount of SR 540 billion as outlook is better. 15% 8% Actual/ Budgeted FALCOM RESEARCH Saudi Budget 2010 Page 4
Clouds of uncertainty disbursed in 2009 Last year, budget 2009 was prepared in the middle of financial crisis that spread like wildfire. Financial markets were in turmoil. Oil had dramatically skidded from historic high that brought crude oil within whispering distance of USD 150 per barrel in July 2008. Crude oil closed around USD 46 per barrel and there were talks of further fall as global economic forecasts turned increasingly ominous. OPEC crude oil basket was quoted at USD 37 per barrel on the eve of the budget. Estimates prove conservative FALCOM Research had expected revenues to receive boost from oil prices. Our calculation last year showed Government assumed USD 38 per barrel price for a production of 7.75 million barrels/day that would have accrued 80% revenue from oil to the total revenues. Once again, Government estimates proved conservative as 2009 revenues are expected to be SR 505 billion against budgeted SR 410 billion. Deficit is not a worry Spending in 2009 was highest ever at SR 550 billion leading to an actual deficit of SR 45 billion. This was less than planned budget deficit of SR 65 billion. Deficit is not a worry as country is sitting on cumulative surplus of SR 1.4 trillion over a six year period starting 2003. Nominal GDP down, real slightly up Clearly 2009 was a year of Government stimulus as it spent highest ever amount despite dismal oil market and generally gloomy global economy especially in the first half. This reflects Government determination to support expenditure program during tough times. As a result economy is expected to close the year with marginal real growth of 0.15%. But nominal GDP is expected to be down 22% at SR 1,384.4 billion. Public debt is marginally reduced Mindful of impact from sizeable spending, Government has only marginally reduced public debt from SR 237 billion a year earlier to SR 225 billion at the end of 2009. Public debt as a percentage of GDP, however, climbed up from 13.3% to 16% because of fall in nominal GDP. Notably, Government has no borrowings from outside. The entire public debt is domestic. 700 600 (SR million) Govt. Debt Debt as percentage of Nominal GDP 120% 100% 500 400 300 200 80% 60% 40% 100 20% 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009e 0% FALCOM RESEARCH Saudi Budget 2010 Page 5
Oil adds brightest color to the rainbow Oil revenues were 89.3% of total revenues in 2008. In 2009, all components of the GDP showed growth except the oil sector which implies the contribution of oil dropped during the year. Still, if it was not for recovery of crude from the depths of 2008 end, deficit would have been larger. A look at the table below will confirm the importance of oil for Government revenues. Oil determines revenues (SR million) 2006 2007 2008 Total revenues 673,682 642,800 1,100,993 Oil revenues 604,470 562,186 983,369 Oil revenues as % of total 89.7% 87.5% 89.3% (Source: SAMA) Saudi Arabia expects fair price of USD 75 per barrel. Prices more than this will burden consuming countries and lesser prices will stem the growth of oil producers. It was proved right by the 2009 deficit of SR 45 billion as the crude oil averaged around USD 60 per barrel. According to OPEC, 2009 was one of the worst years for oil consumption during which overall demand is expected to contract by 1.4 mb/d. Demand for OPEC crude during the year is anticipated to drop more, by 2.3 mb/d from previous year to 28.6 mb/d. Despite fall in demand, oil was supported by falling dollar in 2009. Crude Oil recovers from 2008 closing (USD / barrel) 2009 YTD Avg. Dec. 2008 2008 Avg. OPEC Reference Basket 59.85 38.60 94.45 Brent Crude 60.51 40.35 97.37 W Texas Intermediate 60.71 41.45 100.00 (Source: OPEC) Future outlook 2010 beckons Saudi Arabia with hope. After catastrophic 2009 that tested resilience of developed, developing and underdeveloped countries, there is expectation of better times ahead. Led by emerging economies of India and China that showed better than expected growth, OECD (Organization for Economic Cooperation and Development) countries also stepped out of worst year since the Great Depression. Second half of the year is replete with good news and concern over withdrawal of unprecedented concerted Government actions. 2009 is now expected to register a contraction of 1.1% in global economy. 2010 is expected to clock a growth of around 3% in global economy. OPEC expects 2010 to witness recovery in oil demand after two consecutive years of contraction. Recovery will hinge to a large extent on non OECD countries, downside risk will come from pace of recovery in OECD countries mainly United States. US dollar is witnessing revival and that might weigh on oil prices. However, higher demand for crude oil from recovering economies will counter balance any pressure for downward revisions. OPEC members having seen the benefits of cohesive action will adjust supply according to the demand avoiding overflooding in the well provided market. We expect oil to recover next year. Overall, crude oil prices in the preferred band between USD 70 to 80 per barrel will benefit Saudi Arabia in 2010. FALCOM RESEARCH Saudi Budget 2010 Page 6
Rainbow on the horizon Last year, in the midst of financial crisis and doubts of further worsening, Saudi Government announced Budget 2009. Desperate investors wanting to see a ray of hope were not disappointed by Saudi Government. Actual performance showed Government walked the talk spending SR 75 billion more than the budgeted. It is hard to imagine what would have happened in 2009 without the Government support. Indications of recovery from the corporate sector have been topsy turvy. Thankfully, we have been spared the agonies of job losses, unbridled chain of defaults and bleeding portfolios. Gross domestic product is down 22% in nominal terms and marginally up in real terms. Non oil public sector private sector showed resilience by registering a growth of 5.5%. We expect Saudi economy to consolidate in 2010. A major part of the economy petroleum sector will continue to be under pressure as more capacities will come on stream and global demand will remain weak. Oil prices should settle higher and move in a range of USD 70 to 80 per barrel, dancing to the tune of emerging global economic scenario. Credit off take throughout 2009 remained subdued because of risk averse banking sector. In the last quarter, media attention was taken away from domestic defaults of Saad Group and Al Gosaibi family as clouds of default moved to Dubai. What a difference, a year makes! Uncertainty over global recovery is significantly down. Timing of withdrawal of unprecedented Government stimulus all over the world is being debated but domestically, Government remains committed to a 5 year investment program of USD 400 billion. Infrastructure development, spending on educational programs and investment in health sector is visible. It would take few years to realize the growth potential. Government is making all out efforts for a balanced growth. We expect more new jobs in Government as well as in private sector especially financial services including insurance. In 2010 non oil sector will continue to grow but it is the oil sector that will determine the strength of economic growth and thus the duration of rainbow that is emerging through disbursing dark clouds of 2009. FALCOM RESEARCH Saudi Budget 2010 Page 7
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