The government’s budget for the 2013 fiscal year (31 December 2012 to 30 December 2013) was endorsed by the Council of Ministers on December 29. It was another expansionary budget with a record spending which will play a vital role in supporting the economy. The highlights are:
A surplus of SR9 billion ($2.4 billion) was projected, based on revenues of SR829 billion and expenditure of SR820 billion. This is the second consecutive year since 2008 that the Kingdom has budgeted for a surplus. Education and healthcare remain the focus of government spending, accounting for 37 percent of total spending.
The budget highlights again the government’s intention to continue to stimulate the economy. Budgeted investment spending, raised by 28 percent to an all-time high of SR285 billion, will support healthy economic growth and provide encouragement and opportunities for the private sector at a time of global and regional uncertainty. While revenue projection is less conservative than in previous years, but in the event of a shortfall in revenues, any deficit can be financed comfortably by drawing from SAMA’s huge stock of foreign assets, which stood at $635 billion at the end of November.
A budget surplus of SR386 billion was recorded in 2012 (Jadwa: SR341 billion), compared to a budgeted surplus of SR12 billion. The surplus was the second largest on record, after 2008 of SR580.9 billion. Total revenues were a record high of SR1.24 trillion (Jadwa: SR1.19 trillion) and total spending was also at an all-time high, of SR853 billion (Jadwa: SR847 billion). Spending grew at 3.2 percent year-on-year, a moderate rate compared to the previous two years. This was expected as it came in addition to a massive 26.4 percent expenditures growth last year which was mostly allocated to current spending.
Preliminary economic data show that 2012 was a healthy year for the economy with real GDP growth of 6.8 percent. Non-oil private growth maintained a strong growth of 7.5 percent year-on -year, with construction and transport and communications sectors expanding at double-digit rates. The budget announcement also showed another revision to the 2011real GDP growth from 7 percent to 8.5 percent, the highest growth since 1979.Very high oil export revenues pushed the current account surplus to an all-time high of $178.5 billion.
We estimate that a price of $66 per barrel for Saudi export crude (around $70 per barrel for Brent) and production of 9.6 million barrels per day are consistent with the revenue projection contained in the budget. We expect both revenues and expenditures to be above the budgeted level and forecast a budget surplus of SR177 billion (6.3 percent of GDP) based on oil price of $104 per barrel for Brent.
The 2013 budget
Budgeted spending is at another all-time high in 2013, as the government continues with its program to upgrade the human and physical infrastructure and spurring economic growth. One highlight of the Ministry of Finance (MoF) budget announcement is the 18 percent jump in revenues. With no new initiatives announced, we think this is a sign that the government has maintained the less conservative approach with its oil price assumption since last year. For the second consecutive year, the Kingdom has budgeted for a surplus which set to reach SR9 billion this year (0.3 percent of expected GDP). In the US and across Europe, countries are cutting spending to bring budget deficits under control and reduce their debt. This is not a concern for the Kingdom. While the planned surplus is small, debt is very low and should a deficit occur it can be financed comfortably by drawing on the vast stock of foreign assets rather than issuing new debt, we think.
Total expenditure is budgeted at SR820 billion in 2013 .This is a SR130 billion increase on the figure budgeted for 2012, making it the highest nominal increase in budgeted spending for which data is available.
Budgeted spending is some way below the actual level in 2012 of SR853billion. We don’t view this as withdrawal of the stimulus or a rethinking of the ongoing expansionary fiscal stance. In fact, actual spending as a share of non-oil GDP remains on the high side at 83.5%, compared with 70% of non-oil GDP in the last ten years. In addition, the government has consistently overrun its budgeted spending by an average of 24% over the past decade. The last year that budgeted spending was greater than actual spending in the previous year was 2000. That said, the difference between the level of expenditure budgeted for 2013 and the actual level of spending in 2012 was relatively small at 4 percent, compared to an average of 9 percent over the previous decade. In addition, part of the divergence can be explained by the temporary nature of some of the payments that affected the government budget in 2012 such as the unemployment benefits (SR30 billion), the one-time allocation for the Real Estate Development Fund and The Saudi Industrial Development Fund (SR19.5 billion).
The SR130 billion increase in overall budgeted spending was equally spelt between current and capital spending. Budgeted investment spending has been raised to SR285 billion compared with SR222.5 billion in last year’s budget. Current spending expanded by 14 percent compared with last year’s budget, and accounting for at least 65% of total spending. Current spending is also 85% higher than their level five years ago which highlights the risk of rising rigidity in the kingdom’s budget. Wages and salaries are the largest component of this and are certain to be a major contributor to the higher spending. Operations and maintenance costs are also likely to be a growing source of current spending in future years as major projects become operational.
While budget expenditures in the 2013 budget spans all sectors the priorities are consistent with recent years. Education is allocated the biggest share of those departments disclosed in the budget, at 25 percent of total spending followed by the health and social affairs with 12.2 percent. Municipal services and education received the largest increase in their allocations, at 23 and 21 percent, respectively.
Spending plans for key public sector areas outlined in the budget include:
Education and training was allocated SR204 billion, a 21 percent increase on 2012 allocation, the highest increase since 2007. This will be used to finance work on 539 new schools and 1,900 existing school-construction projects as well as the necessary funds to refurbish 2,000 schools. The allocation also included 15 new colleges and further work to be undertaken on the construction of facilities at newly-opened universities. SR13.4 billion has been appropriated for an electronic university; no other new universities are planned. In addition, SR4.25 billion has been allocated to build three new college hospitals. Finally, SR21.6 billion has been allocated for the over 120,000 Saudi students studying abroad and their families.
Health and social affairs was awarded a 16 percent rise in its budget, to SR100 billion, accounting for 12.2 percent of total spending. New projects in this area will include construction on 19 new hospitals and healthcare centers, adding to the 102 already in progress. Social projects will include construction of 20 new sport club centers and 15 social and rehabilitation centers and social security offices at a cost of SR29 billion.
Water, agriculture and (related) infrastructure spending is budgeted at SR57 billion, an increase of 11 percent. Funds have been set aside for new silos projects, in addition to enhancing water and related utility services supply and improving the water and water treatment networks.
Transport and telecommunications received the third largest increase of any of the areas announced. Spending is budgeted to rise by 16 percent to SR65 billion. New projects in the transport sector include finishing work on existing road projects, finishing industrial cities’ and Ras Al-Khair’s infrastructure projects, in addition to new sea ports and construction of railways.
Municipality services were given a 23 percent increase in budget, the highest increase of any of the area announced. The total allocation thus increased to SR36 billion of which SR4bn will be financed from municipality services. The spending retains the same focus as previous years.
Although not disclosed in the budget announcement, it is likely that defense and security accounted for the largest component of government spending. According to Saudi Arabian Monetary Agency, defense and security spending accounted for 30.8 percent of the budgeted total in 2012, the lowest proportion since 1984. Several multi-billion dollar defense contracts have been signed in last few years and media reports of new agreements appear sporadically. These payments tend to be spread over many years, so the additional impact on spending in 2013 should not be too great.
Total revenue is budgeted at SR829 billion. We anticipate that around 90 percent of total revenue will come from oil; an official revenue breakdown was not published. As is the norm, the oil price and production projections used to derive the revenue figure were not disclosed. We calculate that oil production of 9.6 million barrels per day at a price for Saudi export crude of $66 per barrel (equivalent to around $70 for Brent) and an oil export/revenue transfer ratio of 88 percent is consistent with the oil revenue projection in the current budget.
The government has consistently based its budget on a conservative oil price assumption. Over the last decade the actual oil price has averaged over 70 percent higher than the one used for the budget (for 2012, it is around 52 percent higher). The last year actual oil prices averaged below the budgeted level was 1998. Brent is currently trading at $110.6 per barrel, 58 percent above the level we estimate is used for the budget. Nonetheless, the price assumption in the current budget maintained the less conservative approach started in last year’s budget. As a result, revenues are projected to rise by 18 percent compared with the previous year’s budget. Even though we anticipate that both production and prices will be lower than in 2012 (see box), we think that revenues will be comfortably above the government’s assumption and that using a more realistic oil price assumption is healthy. Revenues generally provide the base from which expenditure is calculated; unrealistically low oil revenue and spending assumptions have contributed to high levels of overspending in recent years.