Saudi Arabia, a golden opportunity (page 1 of 2)

By just about any stretch of the imagination, the figures involved are massive. Rocketing oil prices and production lifted way over the OPEC quota have combined to give Saudi Arabia,
the world's dominant oil exporter, a colossal and unexpected revenue windfall.

The big question is: How can the money be best spent to help the country overcome some of the problems that have mounted up over recent years? Out of the window has gone the projected deficit of $8 billion for the kingdom's 2004 budget. a conservative prediction that was based on an oil price that would be less than half of the current level.

Saudi Arabia posted a budget surplus of $12 billion in 2003 on the back of oil revenues of some $86 billion, and independent forecasts suggest that revenues are likely to go even higher this year.

Samba Financial Group (formerly the Saudi American Bank) recently forecast total oil export revenues for 2004 at $100 billion, based on an average oil price of $31.50 per barrel and average production of 8.7 million barrels a day, and revised up its forecast for the budget surplus to $29.9 billion.

But both the price of oil and the level of Saudi production have increased significantly since those assessments were made. More recent projections have put the budget surplus as high as $34.9 billion.

In past eras of surging oil prices one might have seen the Gulf states splashing out on lavish prestige projects. But not these days. Saudi Arabia's Finance Minister Ibrahim al-Assaf said recently that the expected budget surplus in 2004 would be used to pay off some of the country's debt, which is estimated at 660 billion riyals ($176 billion).

The minister added that the surplus would not be used primarily to fund extra development projects, which would benefit indirectly from repaying the public debt. There are still four months to go before the budget is completed. We should keep in mind uncertainty in oil prices, Assaf pointed out in early September.

While the government is very concerned about placing funds in the right areas, it is also keen to develop projects whenever the opportunity is available. Directing the surplus amount towards offsetting the public debt will certainly have a positive impact on development projects. Any reduction in the loan will provide more flexibility to spend on these projects.

That said, the priority in the kingdom is now clearly debt reduction Ð and job creation. According to Capital Intelligence, 75 percent of Saudi Arabia's debt is held by other government institutions, such as pension funds that are expected to generate structural surpluses for the foreseeable future, meaning that sovereign creditworthiness is likely to remain stable over the medium term, even if the government were to post small budget deficits.

Nevertheless, Capital Intelligence says, the kingdom's ratings are constrained by a weak budget structure (including overdependence on oil) and the longer-term demographic challenges associated with a young and rapidly growing population. The kernel of Saudi Arabia's longer-term economic and social problems is contained in that last statement - an environment of increasing demographic pressures and moderate economic growth, as consultants PFC Energy described it in a recent report on the kingdom.

Unemployment among young people is now recognized by the Saudi government as one of the major difficulties that it will have to tackle in the years ahead. An indicator of this was the cabinet reshuffle last April that saw Water and Electricity Minister Ghazi al-Qusaibi (a former Saudi ambassador to Britain) being appointed the country's first minister of labor.