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Saudi debt seen slightly lower in 2011

By Nadim Kawach

Strong oil prices to boost Kingdom's foreign assets by $85 bln
Strong oil prices will ally with higher crude output to depress Saudi Arabia's public debt slightly in 2012 although an expected fiscal surplus could slash the debt by more than half, according to a local investment firm.

But the surge in oil revenue will sharply boost the country's foreign assets as they could gain a staggering $85 billion by the end of 2011 compared with a year earlier, the Riyadh-based Jadwa Investment said in a study.

From SR167 billion at the end of 2010, Saudi Arabia's public debt is projected to shrink by only about SRseven billion to SR160 billion at the end of 2011.

The decline is one of the slowest rates over the past 10 years although the world's oil powerhouse is expected this year to earn one of the highest incomes since it began exporting crude more than 70 years ago.

The debt dived by nearly SR58 billion in 2010 when the Kingdom recorded a fiscal surplus of around SR109 billion. It was also cut by just SR12 billion through 2009 although the budget suffered from a deficit of SR87 billion.

Jadwa said the debt could remain unchanged at SR160 billion at the end of 2012 despite the expected high income during that year.

It gave no reason for its projection about a slight fall in 2011 debt but in a previous study, a key Saudi bank said the largest Arab economy appears to be intentionally keeping part of the debt as a key money supply tool.

It noted that Saudi Arabia, sitting atop 20 per cent of the world's proven oil deposits, slashed its public debt by nearly 25 per cent through 2010 although it has sufficient overseas financial resources to completely eliminate the debt.

"Even though the government has more than enough reserves to pay off the entire debt, it opted out from such direction, especially that the cost of servicing the debt is currently low," National Commercial Bank ( NCB ) said.

"We do still believe that the Saudi government, justifiably, prefers rather to spend this money to finance expenditure plans at home or to diversify investments abroad. Evidently, it is important to keep a level of sovereign debt as a monetary tool to manage money supply and as a benchmark for pricing corporate bonds and sukuk (Islamic bonds)," said NCB , Saudi Arabia's largest bank.

Saudi Arabia has used strong oil prices over the past 10 years to tackle its festering public debt caused by massive fiscal deficits due to weak crude prices, low oil production by the Kingdom and high public spending during the 1990s.

Official data showed the sovereign debt climbed to its highest ever level of SR689 billion at the end of 1999 before plunging to nearly SR660 billion at the end of 2002. It remained almost unchanged by the end of 2003 before it began its rapid slide in the following years to reach SR614 billion at the end of 2004.

At the end of 2005, the debt plummeted to SR475 billion and continued its plunge to reach about SR267 billion at the end of 2007, nearly 18.7 per cent of Saudi Arabia's nominal GDP of SR1.430 billion.

The debt was sharply cut in 2008 after Saudi Arabia recorded its highest ever budget surplus of SR590 billion as a result of a surge in average oil prides to an all time high of around $95 a barrel.

The decline depressed the ratio of the debt to the GDP from more than 100 per cent to 65 per cent in 2004 and only 13.4 per cent at the end of 2008. But it climbed again to around 16.3 per cent in 2009 due to a sharp drop in GDP because of lower crude prices and output.

Jadwa put the ratio at around 10.2 per cent in 2010 and forecast it to slump to nearly 8.2 per cent in 2011 and 2012.

Its figures showed the surge in Saudi Arabia's income would boost its official reserves to a record high of $605 billion at the end of 2011 from nearly $520 billion at the end of 2010. It expected them to hit another peak of $655 billion at the end of 2012 despite a massive financial handout for citizens announced by King Abdullah over the past week, involving spending of nearly $135 billion.

The report projected the country's revenue to soar to SR916 billion this year from SR735 billion in 2010 and spending to SR821 billion from SR627 billion.

The increase will create an actual fiscal surplus of SR95 billion against a budgeted deficit of SR40 billion, it said.

The report based its high revenue forecasts on an average Saudi oil price of $95.8 a barrel in 2011, the highest ever. The Kingdom's crude production is also expected to climb to 8.8 million bpd from 8.2 million bpd in 2010.

© Emirates 24|7 2011