The revival in oil prices since the OPEC production-cutting agreement last spring has dramatically improved the fortunes of the Saudi economy. The oil sector remains the main engine of growth, accounting for about 75 per cent of government revenues and making a powerful impact on the balance of payments. Figures contained in the government’s budget statement last December provide an insight into the impact of the oil price recovery on financial trends in the kingdom last year.
Growth The government estimates that nominal gross domestic product (GDP) grew by 8.4 per cent to SR 521,300 million($139,013 million) in 1999 from SR 480,800 million ($128,213 million) in 1998, when the economy contracted by 10.8 per cent. Economic growth was accompanied by modest deflation, as the cost of living index declined by 1.2 per cent. Growth was fuelled by the 43 per cent increase in the average price of oil in 1999. This led to an estimated 20 per cent expansion of nominal oil sector GDP, despite production being reduced to an average of 7.7 million barrels a day (b/d) from 8.4 million b/d in 1998.
The non-oil industry sector grew by an estimated 6.3 per cent in 1999 against 5.5 per cent the previous year. Growth was also recorded in the electricity, gas and water sector (3.9 per cent) and transport, communications and storage (2.4 per cent). The private sector grew by 2.4 per cent against 2.2 per cent in 1998 to account for nearly 38 per cent of nominal GDP.
Current account With crude oil accounting for about 85 per cent of total export revenues, the kingdom’s external position showed a marked improvement in 1999. Higher oil prices, coupled with a decline in private transfers and government policies to rationalise spending, led to a dramatic reduction in the current account deficit which, according to the budget statement, fell to SR 14,600 million ($3,893 million) from SR 49,200 million ($13,120 million) in 1998.
Non-oil exports rose by 1.6 per cent to SR 23,800 million ($6,347 million), mainly due to the improvement in petrochemicals prices. Imports remained flat at aroundSR 102,800 million ($27,413 million). By the end of September 1999, the kingdom’s liquid foreign reserves (minus gold) stood at about $6,987 million, down from $7,964 million a year earlier and equivalent to about four months of import cover.
Budget The government adopted a typically conservative budget for 1999: economists say it was based on an average Saudi oil export price below $10 a barrel. With actual oil prices significantly higher, the budget deficit ended up at 6.3 per cent of GDP against 9.3 per cent envisaged originally. The government received revenues ofSR 147,000 million ($39,200 million), up 2.8 per cent on SR 143,000 million ($38,133 million) in 1998. Economists say the revenue figure is surprisingly low in the light of the oil price rebound, suggesting that as much as $10,000 million may have been diverted for other purposes. Non-oil revenues rose by an estimated 4 per cent to SR 47,000 million ($12,533 million) due to the revenue raising measures implemented during the year, which included increases in petrol prices, electricity tariffs, gas prices and fees for work permits.
The rise in oil prices resulted in actual government spending being increased to SR 181,000 million ($48,267 million), 9.7 per cent higher than budgeted. However, this was 4 per cent lower than actual expenditure of SR 189,000 million ($50,400 million) reported for 1998 as the government maintained its strategy of fiscal prudence. Economists estimate that spending on projects declined 35 per cent to SR 13,500 million ($3,600 million) while current expenditure was reduced marginally to SR 168,300 million ($44,880 million), of which wages and salaries accounted forSR 102,000 million ($27,200 million).
Outlook Prospects for the Saudi economy have improved radically from the fairly bleak situation that prevailed in early 1999. Most analysts are predicting an average for Brent oil of about $19 or $19.50 this year, which would be 5-8 per cent higher than the 1999 average of $18.20. Such estimates are based on healthy worldwide demand: global GDP growth is expected to be in the range of 3-4 per cent, with energy demand moving up by a similar percentage.
On the supply side, conditions are tight following the depletion of the huge inventory overhang that drove down prices in 1998. There is already demand for extra OPEC barrels, and there could be room for up to 1 million b/d of extra Saudi oil in 2000.
If these robust predictions are realised, nominal GDP growth could amount to about 6 per cent this year. GDP growth at constant prices, perhaps a better indicator of economic performance, is forecast at 2.2 per cent compared with 1.6 per cent in 1999 and 1998. The oil price recovery had little impact on consumption levels until the fourth quarter of last year, but economists say that business confidence has picked up. Private and non-oil industrial sector output is expected to recover strongly.
If current oil prices are sustained, the government would have more room to manoeuvre on spending plans. The 2000 budget is again conservative, based on an average price for Saudi crude of about $14.70 per barrel. Expenditure is projected at SR 185,000 million ($49,333 million), about 12.1 per cent up on last year’s budget but just 2.2 per cent higher than actual expenditure. Revenues for the year are projected at SR 157,000 million ($41,867 million), up 7 per cent on actual revenues in 1999. The budget deficit is projected to fall by 17.6 per cent toSR 28,000 million ($7,467 million), equivalent to about 5.4 per cent of GDP.
Analysts do not expect a ministerial spending spree in the event of windfall revenues, however. Instead, the focus will be on tackling structural deficits which, after 17 years of state budget deficits, have sent domestic debts spiralling to more than 100 per cent of GDP. Indeed, some say that the rise in oil prices, in addition to the other revenue raising initiatives, could lead to a virtual elimination of the budget deficit in 2000.