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Tue 25 Oct 2011 04:59 PM

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Oiling the wheels of change

High oil means Saudi won't need to tap its reserves to fuel state projects, says Finance Minister Ibrahim Alassaf

Oiling the wheels of change
Saudi has pledged to spend $130bn on housing and other social measures (picture for illustration only)

Saudi Arabia will not need to tap into its reserves this
year to finance additional budget spending but it is considering whether to
issue Islamic or conventional bonds to help fund specific projects, the
country's Finance Minister Ibrahim Alassaf said.

Responding to a wave of social unrest across the region, the
world's top oil exporter pledged early this year to spend an estimated $130bn,
or nearly 30 percent of its economic output, on housing and other social
measures for its citizens over an unspecified period.

That came on top of a record 2011 government budget of
SR580bn ($154bn), raising the possibility that Saudi Arabia might have to dip
into its fiscal reserves, estimated by analysts at about $280bn, to fund
spending.

But Alassaf said he saw no need for this, since robust oil
prices had helped to fill state coffers.

"We have 2-1/2 months until the end of the year and
lots of things can happen, but I would expect that we wouldn't need to tap into
our reserves," Alassaf said.

"Yes we have higher expenditure than projected, but we
have higher revenues than projected," he said on the sidelines of a
meeting of Gulf Arab finance ministers and central bankers in Abu Dhabi.

Analysts polled in September predicted Saudi Arabia would
book a big budget surplus of 11 percent of gross domestic product this year.
But its fiscal position is very sensitive to the level of oil prices and it has
run large deficits in the past when prices have been weak.

On average, analysts estimated the country would need a
Brent crude oil price of $75 per barrel to balance its budget this year; the
price is now well above that, at about $110. If Saudi Arabia continues its
heavy spending plans, however, the breakeven price could rise near $90 next
year, analysts say.

The Saudi government has little debt; the International
Monetary Fund has estimated gross public debt will fall as low as 7.1 percent
of GDP this year. Jadwa Investment has calculated that the kingdom could run a
budget deficit of 10 percent of GDP for the next decade without issuing any
debt and still have substantial reserves.

But there has been speculation in financial markets that the
government could resume issuing debt, in order to prepare markets for the
possibility of heavier issuance if it needs to raise funds in the future.

Alassaf said debt issuance to help cover expanded budget
spending was not on the cards. But he said issues of Islamic or conventional
paper for specific projects were being considered by the ministry.

"We are considering specific project sukuk or bonds - a
productive project that could issue sukuk. For example, the airports which are
a very good investment," he said.

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"We can issue sukuks to be financed from the receipts
of the airport or this specific project. If there is a need for government
guarantees, then we will look into it."

Saudi Arabia plans to spend over $400bn in the five years to
2013 on infrastructure and development projects; it is working on three major
railway projects and upgrading some of its airports.

Asked whether Saudi Arabia was interested in investment
opportunities in debt-stricken Europe, Alassaf said: "When it comes to
investment of official resources, we are different from other countries because
we don't invest long-term. We invest our surplus resources in semi-liquid
assets with low risk.

"We don't invest them in direct investment. When it
comes to the resources of our Funds, especially Public Investment Fund, we are
continuing to focus on local investments."

Alassaf also said he was surprised by a proposal from some
emerging countries in the Group of 20 nations to boost the resources of the
International Monetary Fund.

"I was surprised to read and listen to the proposal for
increasing the resources of the IMF...I think the current resources, including
those that are under process in the quota, would be sufficient to cover needs,"
he said. Saudi Arabia is the only Arab member of the G20.

Some emerging economies, fearing the euro zone crisis could
destabilise them, suggested giving the IMF more firepower to cope with threats
to the global financial system when G20 policymakers met in Paris this month.
China, Brazil and India all favoured bolstering the IMF's capital, G20 sources
said. But they ran into resistance from the United States and other big
economies, burying the idea for now.

"If we think of the huge demand on IMF resources, one
expects it to be from Europe this time, so the main source of those resources
will be the Europeans. Yet the IMF of course should be ready to supplement
those resources and also be ready to help other member countries," Alassaf
said.

Saudi Arabia will provide aid worth $3.75bn to Egypt, whose
economy has suffered from social turmoil in the wake of this year's uprising,
he said.

"It was announced: $3.7bn and it is not all
budget support. It is a mix of different items including budget support, bonds,
and deposits in the central bank as well as concessionary assistance from the
Saudi Fund for Development."

In June, the kingdom gave a $400m cash grant to
Jordan, and it pledged to participate in a $20bn Gulf aid package for
Oman and Bahrain in March.

"Saudi Arabia has been active in helping other Arab
countries, and other friendly countries...We will continue to help them in
their development process," Alassaf said.

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