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Tue 23 Dec 2008 01:55 AM

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Saudi sees budget deficit, more spending in '09

Projected deficit of $16bn compares to record budget surplus of $148bn in 2008.

Saudi Arabia expects to post its first budget deficit since 2002 next year as the world's top oil exporter continues to boost public spending to spur its economy during an oil price slump and global downturn.

The kingdom projects a budget deficit of 65 billion riyals ($16 billion) in 2009 as it raises its expenditures to an expected 475 billion riyals, while revenues are projected to fall to 410 billion riyals, the finance ministry said in a statement.

"This is a confidence-building budget," John Sfakianakis, chief economist at HSBC's Saudi subsidiary SABB bank, noting the kingdom last posted a budget deficit in 2002. "The world is facing a recession and Saudi Arabia is spending the money."

The 2009 budget suggests an assumed price of around $43 a barrel for US crude and $37 a barrel for Saudi oil, down from an average $85 price in 2008, he said.

The expected deficit next year is a sharp turnaround from a record budget surplus of 590 billion riyals in 2008 - more than three times its level a year earlier - the ministry said.

State expenditures in 2008 are seen reaching 510 billion riyals while revenues would hit 1.1 trillion riyals, 90 percent from crude exports, it said.

Oil prices rallied to a record above $147 a barrel in July but have tumbled to around a quarter of that level since then amid demand concerns as many major economies, including the United States and Japan, enter recession.

Economists said huge surpluses accumulated during a six-year oil price boom would allow the kingdom and its Gulf neighbours to sustain local economies during the downturn. Saudi Arabia's 2009 spending forecast is 15.8 percent higher than the 2008 forecast of 410 billion riyals.

Early indications are that the government does not want to overspend next year after 2008 public spending exceeded a government forecast by 24.4 percent.

The Saudi cabinet on Monday instructed public departments not to exceed the amounts allocated to them in 2009's budget, the state news agency reported after the budget was released.

Saudi Arabia raised its education budget by about 18 percent and health and social services budget by 50 percent.

"In such times, typically governments try to compensate for a slowdown in private sector investment expenditures and consumption spending by boosting public spending," said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.

The private sector in Saudi Arabia grew 4.3 percent this year, the ministry said.

"This shows that 2009 will be a very difficult year for the private sector as credit conditions tighten. It will depend more on public spending," said Sfakianakis.

The global downturn and tight credit conditions have already prompted private investors to rethink their regional investment plans.

Rio Tinto last week pulled out of financing its 49-percent stake in a $10-billion Saudi aluminium joint venture. Gulf states seeking to defrost credit markets and improve investor confidence have slashed interest rates and bank reserve requirements, guaranteed bank deposits, poured money into their ailing bourses and set up emergency funding for banks.

A six-year oil revenue windfall, meanwhile, has allowed Saudi Arabia to continue slashing public debt from a peak of 119 percent of GDP in the late 1990s.

The government expects public debt will fall to 237 billion riyals in 2008, 13.5 percent of GDP, compared with 18.7 percent in 2007, the ministry said.

Economic growth in Saudi Arabia is seen accelerating to 4.2 percent in 2008, up from 3.4 percent in 2007, the ministry said. Analysts in a poll by newswire Reuters poll this week expected Saudi Arabian economic growth to slow to 2.4 percent next year from 4.9 percent this year. (Reuters)

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