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Saudi Arabia cuts spending in 2012 budget

December 26, 2011

RIYADH/DUBAI, Dec 26: After boosting expenditure to record levels this year in response to uprisings across the Arab world, Saudi Arabia set a conservative state budget for 2012, but analysts said they expected actual spending next year to be large enough to keep the economy growing comfortably.

The government plans to spend 690 billion riyals ($184 billion) in 2012, the finance ministry said on Monday. That would be up from 580 billion riyals originally envisaged for 2011 but well below this year’s actual spending of 804 billion.

The ministry projected the budget surplus of the world’s biggest oil exporter, which depends mainly on oil revenues, would shrink to just 12 billion riyals in 2012 from 306 billion riyals this year.

However, analysts said the Saudi government traditionally made conservative projections for both spending and oil revenues, leaving room for actual expenditure and budget surpluses to come in much larger than initially forecast.

“We still find this to be an expansionary budget,” said Monica Malik, chief economist at investment bank EFG-Hermes in Dubai, adding that actual spending might rise about 11 per cent next year after a 23 per cent jump this year.

Welfare spending

Saudi Arabia was relatively untouched by the turmoil in the Arab world this year, experiencing minor demonstrations demanding political reform in the east of the country. But the government responded early in the year with a massive increase in spending on welfare and infrastructure projects in an effort to buy social stability.

The International Monetary Fund estimated the new projects would cost some $110 billion over several years. On Monday, the finance ministry said it had set aside 250 billion riyals from the 2011 budget surplus to fund one of the projects, the construction of 500,000 homes.

The ministry’s 2012 spending plan showed authorities would continue to spend heavily on welfare. It included funds to build 742 schools and 137 hospitals, a 13 percent increase in education spending to 168 billion riyals, and 1.1 billion riyals earmarked for technical and vocational training, to help move more of the country’s unemployed into jobs.

“Government spending in 2012 will be a stimulatory factor for the economy,” said Paul Gamble, head of research at Jadwa Investment in Riyadh. “The fact it will remain high is obviously going to help the private sector in terms of confidence.”

The ministry estimated Saudi Arabia’s gross domestic product would grow 6.8 per cent in 2011. A Reuters poll of analysts conducted earlier this month predicted growth would slow next year, partly because of a weak global economic outlook, but remain comfortable at 4.0 per cent.

The budget announcement did not give a forecast for Saudi Arabia’s oil earnings next year or specify the oil price which the government was assuming in its calculations.

However, based on the ministry’s revenue projection, EFG-Hermes estimated it was assuming Saudi oil production of about 8.5 million barrels per day next year at an average price of $55-60 a barrel far below current market levels. Brent crude oil ended last week around $108.

As a result, the kingdom can expect a large budget surplus of around 7.4 percent of GDP next year, down from an estimated 14.1 per cent this year, EFG-Hermes said.--Reuters