Saudi Budget Powers Ahead

December 2006 | Economic Analysis

Government spending looks set to remain buoyant in Saudi Arabia in 2007, with the authorities having announced their biggest budget on record, with expenditures projected to rise to SAR380bn (US$101.5bn). While a full breakdown of figures is yet unavailable, national budget figures released by the Ministry of Finance suggest that this would mark a 13.4% rise from planned expenditures in 2006. In line with historical patterns, we expect actual expenditures to exceed the planned amount, reaching SAR417bn (US$111.3bn), while total revenues are forecast to come in at SAR528.7bn (US$141.2bn) reflecting lower crude prices. With our 2006 average OPEC basket price assumption of US$61.5/bbl looking more or less spot on, we forecast an easing in 2007 to US$54.5/bbl. A record budget surplus was achieved in 2006 thanks to higher than expected oil revenues as the OPEC basket prices reached highs of US$71.4/bbl in July, owing in no small part to geopolitical risks. Having achieved its fourth consecutive budget surplus this year since 2003, historically high oil prices mean that state finances are in a more than comfortable position when it comes to funding increased spending. On the positive front, growth-promoting capital spending is set to make up 52.8% of total spending, with the focus of the budget on infrastructure development and capacity building. At the same time, the repayment of public debt and lack of overly frivolous spending or one-off 'gifts' such as salary hikes is indicative of the increasingly prudent budgetary process. However, while accumulating revenues and diversification of the economy will contribute to fiscal sustainability in the longer term, the dependence on oil remains a fundamental weakness.

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