Event Update Saudi Arabia 3 January 2013

Kingdom of Saudi Arabia Budget 2013

Saudi Arabia Budget 2013

Saudi Arabias budget surplus for 2012 far above governments estimate Budget surplus for 2013 projected at SAR9bn; we estimate it to be SAR349bn Outlay skewed towards education, social and infrastructure sectors Saudi real GDP estimated to have increased by 6.8% in 2012

Largest ever budget; Budgeted expenditure of SAR820bn in 2013 The Kingdom of Saudi Arabia (KSA) unveiled the 2013 national budget which is the largest in its history. In line with its commitment to invest in human capital, the government has emphasized on improving education, social services and basic infrastructure. For 2013, KSA has budgeted revenues of SAR829bn and an expenditure of SAR820bn; this implies a surplus of SAR9bn for the year, lower than the budgeted surplus of SAR12bn for 2012. Surplus expected at SAR349bn; Saudi Arabia might lower crude oil production We expect the Kingdom to record a budget surplus of SAR349bn in 2013, based on our assumption of base case oil price of USD102 per barrel. The IMF expects Saudi Arabias real GDP growth to slow to 4.2% in 2013 and 3.8% in 2014. The forecast is based on the bearish trend in oil prices. Subdued demand and additional supply from other oil producers may compel Saudi Arabia to lower production in 2013. Saudi Arabia registers budget surplus for third straight year in 2012 According to preliminary estimates, Saudi Arabia recorded a budget surplus of SAR386bn (USD102.9bn), or 14% of GDP, in 2012; this was significantly higher than the budgeted estimate of SAR12bn (USD3.2bn) for the period. With this, the Kingdom has posted a budget surplus for the third consecutive year. KSA had budgeted to rake in revenues of SAR702bn in 2012, 30% above the budgeted figure for 2011. However, actual revenues for 2012 totaled SAR1,239bn, about 76.5% higher than the estimate. Increase in oil prices and higher production boost government revenues in 2012 The robust growth in revenues is ascribed to the increase in oil revenues due to the rally in the oil price (Arab light crude rose over USD100/barrel) and higher production. Consequently, Saudi Arabia generated SAR1,140bn in oil revenues in 2012 (contributed 92% to total revenues), a little less than double the governments projection of SAR621bn for the year. Budget Balance & GDP
3,000 2,400 SARbn 1,800 1,200 600 0 10% 0% -10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Budget Balance - LHS GDP- LHS Balance as % of GDP - RHS 40% 30% 20%

Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone: +965 2295 1270

Global Investment House www.globalinv.net

-600

Source: Ministry of Economy & Planning, Ministry of Finance

Global Research GCC

Event Update-Saudi Arabia

Higher revenues enabled Saudi Arabia to increase expenditure in 2012 Saudi Arabia budgeted total expenditure of SAR690bn in 2012, up 19% over the budgeted figure for 2011. Higher revenues enabled KSA to hike wages further, undertake more real estate projects and increase allocation for the unemployment benefit program. Consequently, Saudi Arabia recorded a total expenditure of SAR853bn for 2012, up 23.6% over the budgeted figure for 2012. Budget surplus increased to SAR386bn in 2012 Saudi Arabias budget surplus widened to SAR386bn in for 2012 from SAR306bn (actual) in 2011. This is mainly ascribed to the 11.6%YoY rise in revenues, partly offset by a 6.1%YoY increase in total expenditure. The Kingdom recorded strong growth in revenues due to higher prices and increased crude output. The average Arab light crude price was USD110.6/barrel in 2012, up about 1.9%YoY. Also, oil production averaged 9.8mn barrels/day during JanuaryNovember 2012, nearly 6.5% higher than 9.2mn barrels/day over the same period last year (source: Bloomberg). Saudi Arabia maintained higher oil output to offset the shortfall caused by the disruption of oil supplies from Iran after oil sanctions were imposed on the country. Government Revenues
1,400 1,050 175% 140% 105% 600

Government Expenditure
900 40%

30%
SARbn
20% 300

SARbn

700
70%

350 0
2005 2006 2007 2008 2009 2010 2011 2012

35% 0% 0
2005 2006 2007 2008 2009 2010 2011 2012

10% 0%

Budget - LHS

Actual - LHS

% change - RHS

Budget - LHS

Actual - LHS

% change - RHS

Source: Ministry of Economy & Planning, Ministry of Finance

Strong surplus enabled KSA to significantly expand its foreign assets to SAR144.6bn in November 2012, up 8.5% from SAR133.3bn in December 2011. The Kingdoms foreign assets have increased at a CAGR of 13.6% during 2006-11. We believe the robust foreign asset base would help the Kingdom cushion the impact in case of an oil price shock. Budget Surplus & Foreign Assets
160
140 120

700 600
500 400 300

100
SARbn

80 200 60 100 0 -100 -200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Net Foreign Assets- LHS Budget Balance- RHS

40
20 0

Source: Ministry of Finance, SAMA, Global Research *Net Foreign Assets as on November 2012

January 2013

SARbn

Global Research GCC 2013 Budget Largest in the Kingdoms history

Event Update-Saudi Arabia

In its budget for 2013, Saudi Arabia estimates revenues of SAR829bn, the largest in its history so far. Although the Kingdoms budgeted revenues for 2013 are 18.1% higher than those for 2012, they trail the actual revenues for 2012 by 33.1%. However, this is due to the governments policy of maintaining a conservative estimate. Based on our base case estimate of Arab Light price of USD102.2/barrel and average daily production of 9.3mn bbl/d for 2013, we expect the Kingdom to generate SAR1.2tn in revenues from oil, down 6.2%YoY and 40.2% above the governments projection for 2013. KSA has forecasted an expenditure of SAR820bn (USD218.7bn) for 2013. This is 18.8% higher than the budgeted figure for 2012, but 3.9% lower than the actual expenditure for the year. This translates into a fiscal surplus of SAR9bn for 2013. Based on our scenario analysis, KSA could record a budget surplus of SAR349bn in 2013. Budget Revenues & Expenditure

1,400 1,200 1,000

SARBn

700

600
500 400 300

800
600

200
100 0 -100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

400
200 0

Revenues -LHS

Expenditures -LHS

Budget Balance -RHS

Source: Ministry of Economy & Planning, Ministry of Finance, & SAMA

Growth in allocations for sectors In line with its plans to diversify the economy from oil, KSA continues to allocate a sizable portion of the budget towards education and healthcare. For 2013, Saudi Arabia plans to mobilize funds for the development of education, healthcare and social services, and transport infrastructure to ensure long-term sustainability of economic growth and job creation. The Kingdoms budget has doubled in size since 2006; Saudi Arabia earmarked an investment of USD500bn through to 2020 for infrastructure projects. KSA has earmarked SAR285bn for investment projects in 2013, focusing specifically on those in the science and technology areas.

Education: The sector continues to enjoy the dominant share in allocation. About SAR204bn (USD54.4bn) is earmarked for education for 2013, accounting for about a quarter of the total budgetary allocation; also, it is 21% higher than the figure for 2012. The projects include construction of 539 new schools; upgrade of 2,000 school buildings; building more classrooms; and improving safety measures. Furthermore, KSA plans to open 15 colleges, build housing facilities for faculty members of newly-formed universities, and construct three university hospitals and technical colleges.

Health and Social Affairs: KSA has earmarked SAR100bn for this sector, up 16% over the allocation for 2012. Saudi Arabia plans to focus on the construction of primary care centers and 19 new hospitals. In addition, it intends to build stadiums and sports facilities in 22 towns; 15 social welfare centers; and labor offices. Also, the budget includes allocation for poverty alleviation programs and other social welfare initiatives. January 2013 3

Global Research GCC

Event Update-Saudi Arabia

Municipality Services: KSA has allocated SAR36bn for municipality services for 2013, up 23% over that in 2012. The projects include construction of bridges; inter-city roads; rain drainage control systems; and public transport in Riyadh and Makkah. Infrastructure and Transportation: A sum of SAR65bn has been earmarked for the sector, up 16% over that in 2012. This includes SAR30bn related to the development of 3,700 km of roads; modernization of existing ports; construction of regional and international airports, and berths; and infrastructure projects in Yanbu, Jubail and Ras Al-Khair. Water, Agriculture, Industry, and other Economic Resources: KSA has allocated SAR57bn for these sectors for 2013 (up 11% over that in 2012). The projects include increasing water resources through desalination, construction of dams, and improvement of water and water treatment services. Specialized Credit Development Institutions and Government Financing Programs: The government plans to allocate SAR68.2bn in 2013. Specialized credit institutions include various government funds that would facilitate job creation and boost economic growth. Budget allocation by sector
250

200

150
SARbn

100

50

2005 2006 2007 2008 2009 2010 2011 2012e* 2013e*

Education & Manpower Developments Transportation & Telecommunication

Health & Social Affairs Water, Agriculture & Infrastructure

Municipality Services

Source: Ministry of Finance, * Figures for 2012 and 2013 is the expected sectoral appropriation

GDP growth across sectors in 2012 The Central Department of Statistics and Information (CDSI) estimates Saudi Arabias nominal GDP to have grown 8.6%YoY to reach SAR2,727.4bn in 2012. Private sector is expected to have expanded 11.5% during the same period. The Kingdoms real GDP is expected to have increased 6.8% in 2012 compared to 8.5% in 2011 (revised upwards from the earlier estimate of 7% for 2011). Real GDP growth in 2012 is estimated to have been driven by the oil (5.5%) and non-oil (7.2%) sectors. The non-oil industrial sector is estimated to have expanded 8.3% in 2012, with construction up 10.3%, electricity, gas and water 7.3%, storage and communications 10.7%, wholesale, retail, January 2013 4

Global Research GCC

Event Update-Saudi Arabia

restaurants, and hotels 8.3%, and finance, insurance and real estate 4.4%. The IMFs forecasts are, however, slightly conservative; it estimates Saudi Arabias real GDP to have grown 6.0% in 2012, and believes growth would slow to 4.2% in 2013 and 3.8% in 2014. Economic Highlights
In USDbn, unless specified Real GDP Real GDP Growth (%) Consumer Price Index (%) Revenue Expenditure Surplus/(Deficit) 2006 209.7 3.2 2.3 179.7 104.9 74.8 2007 216.6 3.3 4.1 165.7 118.1 47.6 2008 226.3 4.4 9.9 293.3 136.0 157.3 2009 226.6 0.2 5.1 134.7 146.7 (12.0) 2010 234.6 3.0 5.3 215.2 186.4 28.8 2011 254.5 8.5 4.9 296.0 214.4 81.6 2012 271.8 6.8 6.5* 330.4 227.4 102.9

Source: Ministry of Economy & Planning, Ministry of Finance, SAMA, * data till November 2012

Budget surplus likely in 2013 In our base scenario, we expect KSA to record a fiscal surplus of SAR349bn in 2013. In bull case scenario, we assume the figure to be SAR505bn, while in bear case, we expect it to be SAR213bn. Considering the anticipated increase in production by other oil producers (mainly Iraq and North America) and weak global demand, oil prices are expected to decline in 2013. The EIA estimates about 67% fall in WTI and Brent Crude prices for 2013. Despite this, oil prices may hover at levels higher than the estimates provided by KSA (which appear conservative), given its total revenue projection of just SAR829bn (down 33.1% from actual revenues for 2012). On the other hand, lower pricing (compared to 2012) may prompt Saudi Arabia to cut oil production in 2013. Scenarios for FY2013 Budget Outcome
In SARbn, unless specified Oil Price (USD/bbl) Production (mn b/d) Oil Revenues Other Receipts Total Revenue Total Expenditure Surplus/ (Deficit)
Source: Bloomberg, Global Research

Worst Case 96.7 9.0 980 85 1,065 852 213

Most Likely 102.2 9.3 1,069 93 1,162 814 349

Best Case 107.7 9.6 1,162 101 1,263 758 505

We estimate Saudi Arabias expenditure to be SAR814bn in 2013, 17.9% higher than the budgeted expenditure for the year and 4.6% below the actual expenditure in 2012. Under the best case scenario, we assume the expenditure would decrease to SAR758bn, while under the worst case scenario, we expect it to increase to SAR852bn.

January 2013

Global Research

Event Update-Saudi Arabia

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January 2013

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