Saudi Arabia will likely be tempted by the recent improvement in crude oil prices and increase public spending by nearly 24 per cent through 2009 as an expanded deficit could be easily covered, a leading Saudi bank said yesterday.

Although actual revenues are projected to be higher than budget forecasts, the surge in expenditure will sharply widen the shortfall but the world's dominant oil powerhouse need not borrow again given its massive financial reserves, the Saudi American Bank Group (Samba) said in a mid-year review of the economy of Saudi Arabia.

"The authorities release only annual fiscal data so it is not possible to track budgetary developments through the course of the year. Nevertheless, we have revised both our oil price and output forecast, albeit slightly," it said.

"The net result of this is a revenue projection for 2009 of SR468 billion (Dh458bn) – below our previous forecast but some way above the authorities' budgeted projection of SR410bn. Our spending forecast has also been raised somewhat to reflect the surge in public sector investment witnessed in the first half of this year."

Samba said much of the additional spending would probably not show up in the fiscal accounts since a large part of it is being undertaken by government-owned companies rather than the federal government.

"Nevertheless, some will, and we have therefore raised our spending growth forecast to 24 per cent, giving total spending of around SR632bn.

"This points to a deficit of SR165bn, or 13 per cent of GDP this year."

Samba's forecasts about the deficit are more than twice the shortfall assumed by the kingdom when it approved a record budget for 2009 in a bid to mitigate the downward pressure of the international fiscal turmoil on its economy.

The forecasts are also far higher than projections by another important key Saudi bank, the National Commercial Bank, which last month expected the actual deficit to be cut to SR56bn compared to an assumed gap of SR65bn.

In a policy turnaround, Saudi Arabia has not resorted to borrowing this year to fund its budget, opting instead to withdraw from its overseas assets which climbed to a record high level at the end of 2008 because of strong oil prices.

Economists said the kingdom, the Arab world's largest economy, chose to use its assets to avoid putting further pressure on its fragile liquidity situation.

"The government's robust response to the domestic slowdown can be comfortably accommodated by its financial resources: at end 2008 official net foreign assets were $440 billion, or Dh1.16 trillion, equivalent to 95 per cent of GDP or 235 per cent of imports of goods and services," Samba said.

"The domestic counterpart to these assets meant domestic debt on a net basis [i.e. gross debt less public sector deposits with the banking system] was hugely negative, at 47 per cent of GDP. Since then, net foreign assets have been drawn down by around $40bn, and public sector deposits with the banking system by around $20bn.

"However, net public sector debt is still firmly in negative territory, and is likely to remain there for the next two years at least."

The report said the private sector has been comforted by what it described as the government's vigorous approach to spending, and other efforts to channel more resources to private projects through official institutions such as the Public Investment Fund.

"However, corporate credit dislocations have been severe and private sector confidence is still fragile," the report said.

As for 2010, Samba expected the outlook to be slightly better as it is expecting a 14 per cent rebound in oil prices and a six per cent upturn in Saudi crude output.

"Spending growth will moderate somewhat, but will remain high by historical standards at around 15 per cent. This will leave a fiscal deficit of 11 per cent of the gross domestic product," the Bank said.

The deficit this year will be Saudi Arabia's first budget shortfall since 2002, when it stood at around $5bn, according to the official figures.

In the following years, strong oil prices turned the gap into massive surpluses and allowed the world's oil basin to largely boost its overseas assets to more than SR1.7trn at the end of 2008 after dipping to below SR200bn in late 1990s because of a sharp fall in crude oil prices and the kingdom's production.

The surplus hit an all time high of SR590bn in 2008 after oil prices peaked at nearly $95, pushing Saudi Arabia's revenues to their highest ever level of SR1.1trn, including about SR990bn in oil export earnings. The budget recorded that surplus although Riyadh again overshot expenditure by around 12 per cent to SR510bn.

Petroleum exports fuel the Saudi economy. Oil accounts for more than 90 per cent of exports and nearly 75 per cent of the government revenues.

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