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Wed 21 Dec 2011 12:29 PM

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IMF sees high Saudi spending, budget surplus in 2012

Kingdom’s near-term outlook remains strong on this year's surge in oil revenues

IMF sees high Saudi spending, budget surplus in 2012
HRH Saudi King Abdullah Bin Abdul Aziz Al Saud

Saudi Arabia is expected to maintain a high level of government spending next year but succeed in posting another large budget surplus without needing to dip into its fiscal reserves, a senior official of the International Monetary Fund said.

David Robinson, the IMF's mission chief for Saudi Arabia, said that the euro zone debt crisis had increased the threats to the global economy, which might have negative ramifications for the world's biggest oil exporter.

"Key channels would be similar to those observed in 2008 and 2009. The trade channel, via a decline in hydrocarbon exports and prices, remains the most significant, but spillovers through financial linkages are also important," he said.

However, Saudi Arabia's near-term outlook remains strong because of this year's surge in oil revenues, which boosted the fiscal and external balances of the Arab world's largest economy, Robinson added.

"Gulf Cooperation Council (GCC) countries are in a good position to undertake countercyclical policies and financial sector support measures to mitigate the impact of the crisis, if needed," Robinson said in a written response to questions.

The IMF has forecast a Saudi fiscal surplus of 9.4 percent of gross domestic product in 2011 and 8.0 percent in 2012. The country is expected to announce its 2012 budget next week.

"At this stage, our estimates are that the level of government spending in riyal terms will be broadly similar in 2012 as the likely out-turn in 2011, but this will depend on the policy initiatives that the government may choose to introduce in the budget," Robinson said.

In its original budget for 2011, the government envisaged spending of SR580bn ($155bn). After political unrest erupted elsewhere in the Middle East early this year, Saudi Arabia announced additional spending on infrastructure and welfare which the IMF estimated at $110bn or 19 percent of 2011 GDP; of this, $31bn or 5.5 percent of GDP would likely be spent in 2011, the Fund said.

"At current oil prices we would expect to see another fiscal surplus, about 8 percent of GDP, with no need for a drawdown in fiscal reserves," Robinson said of next year's outlook.

"Our estimates suggest that the break-even oil price for 2012 would be of a similar order of magnitude as in 2011,that is about $80 a barrel -- this is the Arab Light price," he said, referring to minimum oil price at which the country can balance its budget.

In its October regional economic outlook, the IMF projected Saudi Arabia's GDP would grow 6.5 percent this year, slowing to 3.6 percent in 2012.

Inflation in Saudi Arabia hovered below 5 percent for most of 2011 but reached an eight-month high of 5.3 percent in September. In October, it fell back marginally to 5.2 percent and stayed at that rate in November.

"Global food prices have eased a little in recent months and current futures prices do not suggest major new pressures on the horizon," Robinson said. "The level of domestic demand is the key question and this component has increased in recent months.

"This should continue to be monitored carefully and, if warranted, policymakers could use a combination of fiscal and monetary policies to ease pressures."

In its latest regional outlook, the IMF forecast annual inflation of 5.4 percent in 2011 and 5.3 percent in 2012.

Robinson also said he expected further development of the Saudi Arabian stock market, the biggest in the Gulf, though he gave no time frame.

Saudi Arabia has been considering a wider opening of the market to foreign investors for several years; so far, foreigners only have very limited opportunities to invest through indirect ownership and exchange-traded funds that track indexes.

The appointment last week of Central Bank Governor Fahd bin Abdullah al-Mubarak, a former investment banker and a previous chairman of the stock exchange, was seen by analysts as a possible step towards market opening and other economic reforms.

"One would expect to see, over time, greater depth in the market and a broadening in the range of products offered at the stock exchange," Robinson said.

"In turn, this could provide a broader range of options for saving as well as additional instruments for the private sector to finance its investment and therefore create employment."

On other reforms, Robinson said the introduction of a mortgage law could help the housing market.

"Access to finance for housing from the private sector, for example, has long been a constraint that could be addressed through a mortgage law coupled with appropriate institutions to support and monitor housing exposures," Robinson said.

"Currently, the Saudi Real Estate Development Fund (REDF) plays a key role in facilitating access to housing."

A mortgage law which has been in planning stages for almost a decade but it is not clear when such legislation might be passed. Property consultancy Jones Lang LaSalle has estimated the country needs to build up to 200,000 new homes a year for the next five years to meet demand for about 900,000 new homes.

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