Tuesday, Dec 23, 2008

(From THE WALL STREET JOURNAL)

 
   By Mohammed Aly Sergie 

RIYADH -- Saudi Arabia said Monday that it plans to ramp up government spending next year -- despite a sharp downturn in oil prices -- and incur its first budget deficit in six years to keep its economy growing.

The kingdom, the world's largest oil exporter, said revenue next year is forecast at 410 billion riyals, or $109.37 billion, against budgeted spending of 475 billion riyals.

The dramatic drop in estimated income, from 1.1 trillion riyals expected this year, signals that Riyadh is preparing for lower crude prices to extend into next year as a global economic downturn weighs on demand.

The government didn't say what average oil price it was using to calculate its budgetary figures. In Monday's statement, the finance ministryfinance ministry said that oil and petrochemicals represent the major portion of government revenues.

U.S. benchmark crude prices will have to average $43 per barrel in 2009 to cover the budgeted revenue projection, said John Sfakianakis, the chief economist at SABB, HSBC Holdings PLC's Saudi affiliate. On Monday, crude fell $2.45 to settle at $39.91 a barrel in New York.

Saudi Arabia, like other Arab oil-producing countries, traditionally presents conservative government budget estimates based on lower energy prices than the market forecasts. Throughout the oil boom of the last few years, such projections have helped the country amass large foreign-currency reserves, now estimated at around $450 billion, as well as pay down its foreign debt. The ministryministry said that debt would fall to 13.5% of gross domestic product this year, compared with 18.7% of GDP in 2007.

Despite this comfortable position, business and investor confidence in the kingdom have dropped steadily this year, as oil prices have fallen and major developed economies have gone into recession.

The Saudi stock market, the Tadawul index, has dropped around 50% since July, when U.S. benchmark oil prices hit their peak of around $147 per barrel.

In December, Fitch, the ratings agency, said it forecast a 2.6% economic growth rate for the kingdom for 2009, down sharply from this year. The government said Monday that it expects gross domestic product to grow by 4.2% in 2008.

A quarterly business-confidence survey conducted by SABB bank earlier this month concluded that the best hope for growth in the kingdom next year would be beefed-up government spending because businesses in the kingdom "are bracing for a slowdown."

The government's budget appears to respond to that decline in sentiment. The ministryministry statement released Monday said that the kingdom would increase spending so it could "continue the plans for economic growth, maintain an attractive investment environment and increase confidence."

MinistryMinistry figures show that spending is expected to increase across many sectors.

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Margaret Coker in Abu Dhabi and Reem Shamseddine in Dubai contributed to this article.

(END) Dow Jones Newswires

23-12-08 0423GMT