JEDDAH, 25 December 2006 -- The 2007 Saudi budget announced last week is "prudently expansionary in nominal and real terms," even more so if the impact of debt settlement and public investment fund (PIF) capital increase are taken into account, according to an analysis of the National Commercial Bank (NCB).
"If the recently announced mega projects are implemented as scheduled, these funds will be instrumental in financing capital and working capital requirements going forward," said the analysis prepared by NCB's chief economist Dr. Said Al-Shaikh and senior economist Hany Y. Genena.
From an economic growth perspective, the growing bias toward indirect fiscal stimulus packages falls perfectly in line with ongoing market liberalization. So far, private nonoil investment has significantly lagged government investment in fueling domestic demand. The 2007 budget is gearing up to prepare for the inevitable reversal of this trend, as government investment in infrastructure and utilities sets the stage for an upcoming private sector-led investment boom.
"From a fiscal perspective, we also believe that the prudently expansionary 2007 budget is appropriate at this stage of the business cycle and at this juncture in the Saudi structural development process," the NCB said.
In the fourth quarter of 2006, oil prices have come under downward pressures due to a slowing down of the US economy and build up of inventories whereas production cuts have been already instituted and implemented by most OPEC members. "Given that the government was plagued by persistent deficits and debt burden throughout the 1980s, we believe that fiscal prudence is a highly commendable policy stance," the bank stated.
The 2007 budget estimates total revenues at SR400 billion, total expenditures at SR380 billion and a surplus of SR20 billion. Out of the SR380 billion budgeted expenditures, total capital investment represents about one-third (36.8 percent) inclusive of both greenfield projects and capacity expansions.
Following are the budget highlights and NCB's views:
On Dec. 18, the Ministry of Finance (MOF) announced the final outcome of fiscal operations and overviews of macroeconomic performance, both of 2006 and the budget of 2007. The actual fiscal surplus in 2006 stood at SR265 billion, 20 percent of gross domestic product (GDP) and only 3.5 percent higher than "our projected SR257 billion." Crude oil production cuts, on the other hand, put a damper on real GDP growth rate, which decelerated to 4.2 percent in 2006, down from 6.6 percent in 2005.
Budgeted expenditures in 2007 came in 13.4 percent higher than budgeted expenditures in 2006 whereas budgeted revenues stood at SR400 billion, nearly flat in nominal terms compared to 2006 budgeted revenues. However, in real terms, after adjusting for the rising costs of construction materials and nominal effective exchange rate (NEER) depreciation, growth in budgeted expenditures is likely to be slightly lower than the headline figure.
Nonetheless, the indirect expansionary impacts of the 2007 budget are deemed to be far more important than the direct impact. The MOF recently announced it will negotiate a call back of outstanding treasury securities and also decided to allocate SR20 billion to increase the capital of the PIF. In effective terms, these two actions amount to liquidity injection operations.
In fact, the greater focus of the budget on capital expenditure, debt retirement and reserve accumulation while simultaneously replenishing the main funding sources of the private sector (mainly banks and the PIF) is highly commendable at this stage of the cycle, the bank said. "Nonoil private sector investment has so far lagged government investment and our projections suggest that this trend will likely reverse aggressively over the medium-term."
In line with expectations, the Kingdom's fiscal surplus to GDP ratio jumped to a record 20.5 percent in 2006. According to the announcement, fiscal revenues and expenditures accelerated 40 percent and 14 percent to SR655 billion and SR390 billion, respectively. The current account surplus, which is partially a reflection of public savings, stood at SR358 billion ($95 billion) in 2006, about 27.5 percent of estimated GDP.
High average crude oil prices in 2006 were instrumental in fueling the twin surpluses. Despite the recently correction in crude oil prices and the recent cuts in production levels, average Saudi Light spot cure oil price in 2006 year to date (YTD) was 22 percent higher than average 2005 prices. Accordingly, fiscal revenues soared to an all-time high of SR655 billion, or about 50 percent of estimated GDP.
Growth in actual expenditures, interestingly, remained nearly stable at around 14 percent for the third year in a row. In 2006, actual expenditures stood at SR390 billion, compared to budgeted expenditures of SR335 billion and actual 2005 expenditures of SR341 billion. Interestingly, the government has maintained a semi-steady rate of growth of 14-15 percent in actual expenditures since the beginning of the current cycle, in contrast to erratic policy shifts during the 1990s. "We believe this is a sign of a structural shift in fiscal policy from short-lived stimulus packages to a longer-term sustainability framework," the NCB stated.
Soaring petrodollar inflows have been prudently extended so far. Fiscal prudence has been partially evident in the sustained increase in the stock of government deposits in Saudi Arabian Monetary Agency (SAMA). From January 2003 to October 2006, these deposits surged from SR43 billion to SR383 billion.
Nonetheless, the government has so far borne the brunt of fueling investment demand, evidently to crowd in private investment over the medium-term. Budgeted expenditures in 2007 have been 13 percent higher than the 2006 budget. Budgetary overruns have been the norm historically, so the impact is stable on a year on year basis.
By K.S. Ramkumar
Arab News 2006
