Reserves get a shot in the arm with rise in oil revenue

PUBLISHED : Thursday, 23 September, 2004, 12:00am
UPDATED : Thursday, 23 September, 2004, 12:00am

THANKS TO THE unexpected strength in oil revenues, the kingdom is receiving a shot in the arm that will further improve its financial health.

The Saudi government is expected to enjoy a doubling of the oil revenues forecast in the budget.

Saudi American Bank (Samba) chief economist Brad Bourland said this would result in a fiscal surplus of 112 billion riyal (US$28 billion), the kingdom's highest ever.

Early this year, the bank forecast a budget deficit for the year but revised its projection at the end of the first quarter upward to a budget surplus of 20 billion riyal. The latest revision upward reflects higher than expected oil production and prices.

Revenues this year would far exceed government expectations, which were based on a conservative oil market forecast.

Mr Bourland said the large surplus should result in another year of meaningful debt reduction and growth of foreign assets.

He forecast the government would reduce its debt, which was all domestic, by 30 billion to 600 billion riyal, or 71 per cent of this year's GDP. Foreign assets at the central bank should show strong growth as well.

According to the latest central bank data, foreign assets grew by 20 billion riyal in the first four months of this year.

Samba expects this trend to continue throughout the year, with total assets at year end totalling about US$75 billion, compared with $59 billion at the end of last year and $41 billion at the end of 2002.

This created a substantial asset cushion for defending the country's pegged exchange rate to the US dollar, which had been in place since 1986, the bank said.

In other monetary developments, inflation is likely to remain low at about 1 per cent, and interest rates, mirroring rates in the US, are likely to rise marginally from current 40-year lows.

A large fiscal economic stimulus through expenditure of high oil revenues is not occurring.

The bank said the economy was strong but not experiencing a repeat of the 1970s government spending-driven oil boom as the government appeared to be using most of its unexpected oil revenues to improve its fiscal health, rather than sharply boost its spending.

While local markets and the economy had ample liquidity, they were not reflective of the large jump in oil revenues, it said. The government's spending policy this year is only mildly stimulating the overall economy.

Spending increases in the 2004 budget came in the categories of human resource development or education, up 28.4 per cent from 2003 budgeted levels, and in social development, which includes health care, social welfare and labour affairs, up 45 per cent from the previous year.

In education, three new universities are being opened in the kingdom and have received their first budget allocations. Technical education and vocational training received an 87 per cent increase in budget allocation.

While these categories of spending have risen in past years, the bank said they generally had not grown to this extent, reflecting the focus now being placed on improving education and developing workplace skills.

Non-oil revenues provide about 40 billion riyal, or 20 per cent of budgetary revenues, from sources such as investment income, taxes, customs duties and fees. The amount and sources of non-oil revenues had not changed significantly in many years, nor did they appear likely to change in the 2004 budget, Samba said.