Saudi Arabia’s fiscal balances and target oil price for 2010

CGES | JANUARY 2010 | SOURCE: Global Oil Insight

In retrospect, 2008 proved to be an exceptional year for the Kingdom of Saudi Arabia. A massive fiscal surplus thanks to record high oil prices in that year enabled the Saudi government to boost its core spending and at the same time build very large financial reserves that offer good support during these leaner times.

The Kingdom posted a smaller fiscal deficit in 2009 than expected due to its ultra conservative oil price assumptions and the same is likely to occur this year.

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Despite an assumed 14% over-spend against budget in 2010, Saudi state revenues should be robust enough to prevent the fiscal deficit from exceeding $4 bn, compared with last year's $12 bn.

An OPEC basket price of $71/bbl should generate enough funds this year to cover all of Saudi Arabia's expected expenditure on current and capital account, and service the Kingdom's debt. Another $3/bbl would allow the Kingdom to set aside $5 bn as a contingency reserve.

What a difference a year makes

This time last year the Saudi authorities had every reason to be pleased with their country's fiscal affairs. Having budgeted for a modest $11-bn surplus in 2008, the Saudi budget was in the black by a bumper $157 bn in that year thanks to a massive 144% increase in revenues against the budgeted amount, which completely overwhelmed the 24% rise in actual expenditures over planned.

For this the Saudis could mainly thank an entirely unexpected 37% rise in the OPEC basket price in 2008, which was complemented by a 6% increase in Saudi oil production, a double barrelled blast of good fortune.

Realising that it was naive to expect the OPEC basket price to stay at the stratospheric levels of mid-2008, especially in view of the global recession that seemed to be gathering pace at that time, the Saudis budgeted a much lower oil price for 2009 (we estimate that this budgeted price was around $49/bbl), which in conjunction with lower assumed expenditures yielded a budgeted deficit of $17.4 bn for 2009.

Leading to a lower deficit than planned ($12-bn). Thanks to a sustained rally in the price of oil, which lasted from February '09 till June last year, the average OPEC basket price for 2009 was $60.8/ bbl, 24% higher than our estimate of what the Saudi authorities had budgeted for the year.

It seems that the OPEC policy of shutting in production to prevent oil price from collapsing during a global recession paid much better dividends than expected. In fact, we had anticipated such a favourable outcome by projecting Saudi state income for 2009 at $159 bn.

Although actual revenues for 2009, at $135 bn, were much lower than we had anticipated, so too were Saudi expenditures, generating a $12-bn deficit that was marginally above our own $11-bn deficit projection for Saudi Arabia in 2009.

The 2010 budget

Once again the Saudi planners are adopting a cautious stance as far as the Kingdom's finances are concerned by assuming that oil prices will stay on the low side in 2010. They have budgeted for a $19-bn fiscal deficit this year, broadly similar to the planned deficit for 2009, a deficit we think the Saudis have based on an OPEC basket price of around $54/bbl and an assumed oil production level of 8.3 mbpd for the Kingdom.

In the light of recent Saudi experience, we believe both their revenues and their expenditures will end up being higher than budgeted, but the balance of the two will yield a modest deficit of $3.4 billion in 2010, good news for Saudi Arabia at a time when a number of countries in the developed world are struggling with massive fiscal deficits.

Saudi state expenditure is usually higher than budgeted (the average overrun was 19.5% over the period 2005-9), hence our projection of $164.5 bn for aggregate expenditure versus the budgeted amount of $144 bn.

By applying the 19.5% average overrun since 2005 to the budgeted amount for 2010 we obtain a projected expenditure total of $172 billion, but we think the Saudis will try to restrain their spending by cutting back on planned capital expenditure, as it is believed they did in 2009.

General expenditure is expected to rise by 15% in 2009, half of which will be accounted for by salary increases and consumer price inflation. Debt interest will be somewhat higher too, because the national debt rose in 2009 for the first time for some years. Our figure for the likely level of aggregate Saudi spending this year represents an uplift of 14% on the budgeted total.

Saudi Arabia's fiscal revenues have also been underestimated in recent years. The underestimate in 2009 was 23%, largely because the oil price was higher than expected, and we think the same will happen this year.

Our projected oil price for 2010 is $70/bbl for the OPEC basket, considerably higher than the oil price implied by the Kingdom's revenue projections for this year ($54/bbl), hence our much higher overall revenue forecast of $161 bn versus the official $125 bn.

Investment income is likely to be down because of persistently low interest rates and a lower asset base, but we have assumed a slight increase in non-oil income due to an expected improvement in the domestic Saudi economy this year.

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