Saudi heads for record budget deficit

Saudi Arabia is heading for one of its largest-ever budget deficits in 2002. This week the finance ministry announced a projected deficit of $12 billion that assumes an average oil price of $16-17, and oil production levels of 7.6 million barrels per day.

From the business point of view it is good news that the present high level of expenditure will be maintained in the face of a slump in crude oil prices. Total expenditure this year of $68 billion is already running at 18.6% higher than last years' estimate, so it will be beneficial to business if this level of spending is maintained in 2002.

However, the price for continued higher spending will be the $12 billion deficit and a consequent rise in domestic debt. The government has indicated that it does not intend to borrow abroad, nor does it need to. But domestic debt will rise from 100% to around 115% of GDP in 2002.

Of course, it is true that an oil price estimate of $16-17 per barrel for 2002 may turn out to be too conservative. This oil price estimate compares with $22-23 per barrel this year and $27 last year.

But economists expect the projected deficit to give new impetus to economic reform in general and the privatisation process in particular. There will doubtless also be a further push to encourage foreign direct investment into Saudi Arabia, and the $25 billion Saudi Gas Initiative will be sure to move forward quickly.

Indeed the situation is reminiscent of 1998-1999 when the last oil price slump forced the Saudi government to take a number of decisions to speed up reform and privatisation. For example, there was the creation of the Saudi Arabian General Investment Authority, new laws on foreign investment and the lowering of electricity subsidies. The Supreme Economic Council was also formed at this time.

So what can we expect from Saudi Arabia in 2002? More foreign investment projects will surely emerge, and perhaps a major privatisation, such national carrier Saudia.

For diversification away from a dependence on oil revenues will surely be the focal point of government policy. That in itself may present some interesting business opportunities in the Kingdom of Saudi Arabia during 2002.