The Saudi Arabian government released its 2009 budget – one of the first glimpses of how key oil exporters may respond to the changed oil price outlook for 2009. At current (sub $40/b) oil, most will run fiscal deficits and some will run large ones. Saudi Arabia’s budget takes such concerns in stride, projecting a budget deficit for the first time since 2004. And despite comments in the press, its not necessarily expansionary – they plan to spend more than they planned to in 2008 but less than they actually did. While Saudi Arabia (and most of its GCC neighbors) maintained conservative budgeted oil price estimates, expenditures have been rising significantly since 2006. Yet, despite increasing spending, Saudi Arabia’s revenues (which are primarily from hydrocarbons) were almost double that of expenditures in 2008. Yet past history warns that spending catches up and the big question is whether the oil price slump will cause a spending slump as was the case in the 90s.
Several oil exporters have had to scale back spending plans already. Nigeria notably reduced its oil price estimate to $42.5/b meaning the preliminary spending plan based on $62/b had to be scaled back. Kuwait has also suggested that it may pare back spending in 2009. Aside from reducing transfers to the underfunded pensions which put its oil price break even point as high as $75/b, it may find it difficult to do so. Russia by contrast is rolling out major spending though it is uncertain if the planned infrastructure projects will continue on course as it turns to supporting its financial sector and the Moscow construction sector.
The oil windfall saved over the past few years may serve GCC and North African oil exporters well. They have been relatively conservative should have funds to support spending plans and avoid economic contraction although some of them may have fewer liquid funds than previously thought. Spending more might not only cushion domestic economies but would also avoid exacerbating the global demand slump.
The Saudi budget is laden with infrastructure spending to maintain high profile projects, avoid job losses. With its large population and concerns about any increase in unemployment, Saudi Arabia was unlikely to scale back spending much. The government may also have to take on a larger share of financing than it previous hoped. But the Saudi ‘private sector’ was never very large, if one excludes the private wealth of individuals tied to the ruling family and partially privatized SOEs. Past history from the 80s oil slump suggests it is difficult to scale back spending. Furthermore, current planning may be in part based on the assumption oil prices will rebound. So what does the 2009 spending actually look like. Despite a projected decline in revenues as oil revenues fall sharply in 2009, the Saudi government announced plans to maintain spending just below 2008 actual levels, which would imply a deficit of SR 65b – about $18b. If Saudi Arabia sticks to its budget, which is unlikely given history, it actually wouldn’t be expansionary.
Source: Government via Samba, Jadwa In keeping with past practice, the authorities did not reveal their oil price assumption but private sector estimates of the oil price to balance the budget range from $37/b (SABB) to $44/b for Saudi oil/ $48b WTI based on 8.1mbd (Jadwa). Standard Chartered has a similar assumption. 2008 spending required an estimated $45-54/b.
At current oil prices, and likely any oil price below $55/barrel WTI, planned spending would imply a fiscal deficit, the Kingdom’s first since 2002 and first budgeted since 2004, when oil prices surprised on the upside as they have done each year since 2002 at least. Given that Saudi Arabia has rarely stuck to its planned budget, we may need to assume at least a $60/b oil price for a balanced budget (and current account surplus).
Source: IMF, private sector estimates, authors estimates Planned expenditure is SR475bn for 2009, only slightly lower than actual spending in 2008 (SR510b) which in turn was SR100b or 24% higher than planned in 2008 budget. Budget plans to spend SAR 225bn ($60bn) or 55% on development projects.
The budget implies significant spending increases in education (including 1500 new schools) health and social services (86 new hospitals), water, infrastructure and transportation (new roads) – all of these segments will see a planned spending boost of over 16% over that planned in 2008. Defence and security spending will also likely increase though it is not detailed in the budget. Wage hikes announced earlier in 2008 should boost current spending.
Saudi Arabia of course has a very large stock of foreign assets and one that has grown tremendously this year, absorbing most of the record oil revenues. Total reserve and non-reserve foreign assets of Saudi Monetary Agency will exceed $500b at the end of the year (including the foreign assets of the Saudi pension funds). These are primarily in liquid assets though SAMA is known to have some equities. Furthermore, SAMA’s conservative asset allocation means they have held their value this year, unlike the 25-40% losses likely suffered by the more aggressive funds of the smaller GCC countries (for more, watch for a paper with Brad Setser early in the new year).
Source: SAMA, my estimates Furthermore with a now-small (13.5% of GDP or about than $60b) – and almost entirely domestic – debt position, Saudi Arabia need not fear a debt explosion. If necessary the government should be able to borrow from key domestic institutions like the pension funds as it has done in the past. It has consistently paid down its debt during the recent oil boom.
Source: Samba, Jadwa Given that the Saudi economy is already slowing, the government’s largess is important. John Sfakianakis of SABB notes “Although counter fiscal measures in the 1980s and 1990s were evidenced, the budget for 2009 is by far the largest.” – the 38% capital expenditure increase goes against the grain of past oil slump budgets when capex was the first thing cut.
2008 Saudi real GDP growth (4.2% according to government estimates) is likely to have outpaced the 3.7% recorded in 2007, largely because of higher oil output. With the reduction in output from production cuts, growth should also slow. The focus on infrastructure, providing capital etc to offset any private sector withdrawal will help but Saudi growth would slow sharply with even $55-60 average oil price. Standard Chartered suggests 2% real GDP growth in 2009.
It’s been clear for some time that the government would need to step in to offset the withdrawal of foreign private capital. IPOs are a non-starter and despite several high-profile loan syndications, the sort of private capital raisings accomplished in 2007 and early 2008 are delayed for now. Even some high profile projects, like King Abdullah city have reportedly been delayed. And we should expect more of the same. Meanwhile, diversification away from oil has still not gotten very far and the private sectors role may be slipping meaning that government actions may be effective in supporting growth Non-oil private sector growth, which is the key to long-term growth slowed to 4.3% growth in 2008 from 5.7% growth in 2007. High inflation probably affected the private sector most, but the government pump-priming is necessary.
Jadwa points to a possible silver lining – the government investment plans may take advantage of lower project costs and raw material prices making the investment plans more affordable. It also sends an important signal to investors about the underlying health of the economy and the strength of government finances and should lift confidence, bolstering the stock market. – Or so the authorities must hope. Though they may also be hoping that once again their oil price estimate proves conservative given than in the midst of a global recession expenditure risks are on the upside and revenues are on the downside. At least the pools of capital remain large and with inflation in the decline, the government is in a better place to take the fiscal and monetary measures to support the economy. But at current oil prices… it also means that Saudi Arabia will be spending not saving its oil revenues and that SAMA, one of the few global central banks still adding to its funds in Q3 and Q4 of 2008 may join the disaccumulation trend (after adding well over $150 billion in 2008.
SAMA, IMF, estimates
Note: This note was adjusted slightly after posting