Saudi Arabia: Record Surplus

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05 October 2007
Saudi Arabia recently unveiled a record budget surplus for the fourth consecutive year. It achieved a surplus of $77.5bn for 2006 thanks to high oil prices.

The Saudi Arabian Monetary Agency (SAMA)Saudi Arabian Monetary Agency (SAMA), the Saudi equivalent to a central bank, had initially projected a surplus of $14.7bn and a revised final figure of $58bn back in 2005. The projected surplus for 2007 is $5.3bn. Oil prices this year have topped $80 a barrel. As Saudi Arabia bases its budget estimates on oil revenues below market levels to allow for fluctuations, the difference between government forecasts and actual figures is no surprise.

The budget surplus was achieved despite record public spending by the government, which amounted to $105bn and went mostly towards development projects and the repayment of some public debt.

The kingdom's balance of payments also registered a surplus of $99bn for 2006.

Meanwhile, the country faces a concern with rising inflation. In 2006 inflation was 2.2%, reaching 3.8% in July 2007. According to John Sfakianakis, chief economist at Riyadh-based SABB, the inflation is driven by a massive influx of liquidity.

Basel Algadhib, chief executive of Morgan Stanley Saudi Arabia, told OBG, "Yes, inflation is a worry especially in areas such as rent and food, but what people have to remember is we've enjoyed a near zero inflation rate for a very long time."

In 2006, the private sector saw growth of 6.4%, the highest in 25 years. At the same time, the public sector grew by 6.1%, the highest level in nine years. These economic successes have been attributed to an increased level of domestic and foreign investments in various sectors.

The news of the budget surplus has been met by escalating speculation that it is time for the kingdom to revalue the Saudi riyal.

On announcing the surplus, Hamad Al Sayari, governor of SAMASAMA, said the kingdom has no plan to revaluate the dollar-pegged riyal.

"We are not considering any change," he told local press, putting an end to mounting speculation it might strengthen its currency, after SAMASAMA held back from matching last week's US interest rate cut.

The Saudi riyal, which has been effectively pegged to the US dollar since 1986, has come under pressure to revaluate due to the idea that the Saudi currency is now out of kilter. The high oil prices of recent times and the strength of the domestic economy should result in a strengthening of the riyal. Oil accounts for the vast majority of both budget and export revenues, 91% and 88% respectively.

However, the recent weakness of the US dollar is causing the riyal's external value to depreciate, while inflationary pressures are causing its internal value to deteriorate, leading to questions regarding the dollar-pegging policy.

"The dollar is the main currency for the kingdom's exports as they are priced in dollars. Payments are also done in dollars. Many countries to which we export are linked with dollar in one way or another," the SAMASAMA governor explained.

He said the kingdom's monetary policy was based on what would be best for the domestic economy and what investors would find attractive. "It is not necessary for us to follow a cut in the interest rate, especially when there is high liquidity...We think exchange rate stability and transparency are important for investors."

Meanwhile, according to a recent World Bank report, Saudi Arabia has made great progress in improving the Saudi business environment's attractiveness for investors. In its fifth annual "Doing Business" survey it rates reforms undertaken to improve the business climate of a 178 countries. Saudi Arabia improved its ranking from 38 to 23. Saudi Arabia tops the poll as the best place to do business in entire Middle East, ahead of Kuwait (40th) and the United Arab Emirates (68th). The report also ranks Saudi Arabia ahead of advanced economies such as France (31st) and Austria (25th).

© Oxford Business Group 2007