Spending growth will moderate in 2012 compared with last year. In 2011, spending growth reached 24%, the highest in a decade. The government raised public sector wages, created government jobs, injected capital into state-owned lenders and pledged more resources for housing. Capital spending, mainly on infrastructure, exceeded 12% of GDP.
Saudi budgets typically underestimate both revenue and spending. In 2002-2011, central government spending exceeded the budget by an average of 24.8%. But in each year other than 2009, oil prices lifted revenues beyond expectations, giving the government room to spend more without running a deficit.
In its National Budget released December 26, the Ministry of Finance projected total revenues of $187.2billion and government expenditure of SR690billion, giving a surplus of SR12billion.
This appears to be based on a conservative oil price assumption. Assuming Saudi Arabia reduces oil output to an average of 9mbd in 2012, the breakeven oil price would be around $60/b.
However, a budget overspend in line with the recent historical average would result in spending of SAR846bn and push up the breakeven oil price to USD75/b. At Fitch’s oil price assumption of $100/b, revenue would reach SR907billion, giving a surplus of SR61billion, or around 4% of GDP.
Over the medium term, there is still a possibility of Saudi Arabia running a deficit by 2015. Assuming 7% spending growth, which would be lower than the annual average of 12.5% in 2002-2011, modest oil output growth, and an average oil price of $100/b, the country would run a deficit of 1% of GDP by 2015.
Fitch rates Saudi Arabia ‘AA-‘ with a stable outlook. The high investment grade rating largely reflects the very strong sovereign and external balance sheet. The sovereign balance sheet improved further in 2011, despite the highest spending growth in a decade. Sovereign net foreign assets grew by over $100billion to 112% of GDP. With Brent averaging $110/b, the general government surplus for the year was 14% of GDP, higher than our expectation of 7.5% when we affirmed the rating on April 8, 2011. That estimate was based on an assumption of $100/b.