Exclusive: Saudi Arabia won't tap reserves, mulls project bonds

By Asma Alsharif

Responding to a wave of social unrest across the region, the world's top oil exporter pledged early this year to spend an estimated $130 billion, or nearly 30 percent of its economic output, on housing and other social measures for its citizens over an unspecified period.

That came on top of a record 2011 government budget of 580 billion riyals ($154 billion), raising the possibility that Saudi Arabia might have to dip into its fiscal reserves, estimated by analysts at about $280 billion, to fund spending.

But Alassaf said he saw no need for this, since robust oil prices had helped to fill state coffers.

"We have 2-1/2 months until the end of the year and lots of things can happen, but I would expect that we wouldn't need to tap into our reserves," Alassaf said.

"Yes we have higher expenditure than projected, but we have higher revenues than projected," he said on the sidelines of a meeting of Gulf Arab finance ministers and central bankers in Abu Dhabi. The interview was conducted Friday but embargoed for release until Monday.

Analysts polled by Reuters in September predicted Saudi Arabia would book a big budget surplus of 11 percent of gross domestic product this year. But its fiscal position is very sensitive to the level of oil prices and it has run large deficits in the past when prices have been weak.

On average, analysts estimated the country would need a Brent crude oil price of $75 per barrel to balance its budget this year; the price is now well above that, at about $110. If Saudi Arabia continues its heavy spending plans, however, the breakeven price could rise near $90 next year, analysts say.

DEBT ISSUANCE

The Saudi government has little debt; the International Monetary Fund has estimated gross public debt will fall as low as 7.1 percent of GDP this year. Jadwa Investment has calculated that the kingdom could run a budget deficit of 10 percent of GDP for the next decade without issuing any debt and still have substantial reserves.

But there has been speculation in financial markets that the government could resume issuing debt, in order to prepare markets for the possibility of heavier issuance if it needs to raise funds in the future.

Alassaf said debt issuance to help cover expanded budget spending was not on the cards. But he said issues of Islamic or conventional paper for specific projects were being considered by the ministry.

"We are considering specific project sukuk or bonds -- a productive project that could issue sukuk. For example, the airports which are a very good investment," he said.

"We can issue sukuks to be financed from the receipts of the airport or this specific project. If there is a need for government guarantees, then we will look into it."

Saudi Arabia plans to spend over $400 billion in the five years to 2013 on infrastructure and development projects; it is working on three major railway projects and upgrading some of its airports.

INVESTING LOCALLY

Asked whether Saudi Arabia was interested in investment opportunities in debt-stricken Europe, Alassaf said: "When it comes to investment of official resources, we are different from other countries because we don't invest long-term. We invest our surplus resources in semi-liquid assets with low risk.

"We don't invest them in direct investment. When it comes to the resources of our Funds, especially Public Investment Fund, we are continuing to focus on local investments."

Alassaf also said he was surprised by a proposal from some emerging countries in the Group of 20 nations to boost the resources of the International Monetary Fund.

"I was surprised to read and listen to the proposal for increasing the resources of the IMF...I think the current resources, including those that are under process in the quota, would be sufficient to cover needs," he said. Saudi Arabia is the only Arab member of the G20.

Some emerging economies, fearing the euro zone crisis could destabilise them, suggested giving the IMF more firepower to cope with threats to the global financial system when G20 policymakers met in Paris this month. China, Brazil and India all favored bolstering the IMF's capital, G20 sources said. But they ran into resistance from the United States and other big economies, burying the idea for now.

"If we think of the huge demand on IMF resources, one expects it to be from Europe this time, so the main source of those resources will be the Europeans. Yet the IMF of course should be ready to supplement those resources and also be ready to help other member countries," Alassaf said.

Saudi Arabia will provide aid worth $3.75 billion to Egypt, whose economy has suffered from social turmoil in the wake of this year's uprising, he said.

"It was announced: $3.7 billion and it is not all budget support. It is a mix of different items including budget support, bonds, and deposits in the central bank as well as concessionary assistance from the Saudi Fund for Development."

In June, the kingdom gave a $400 million cash grant to Jordan, and it pledged to participate in a $20 billion Gulf aid package for Oman and Bahrain in March.

"Saudi Arabia has been active in helping other Arab countries, and other friendly countries...We will continue to help them in their development process," Alassaf said.

(Additional reporting by Martin Dokoupil; Editing by Andrew Torchia)