Last week's decision by Moody's International Services to upgrade the ratings of Saudi Arabia's economy could not be more appropriate.

In particular, the agency raised the ratings for Saudi Arabia's foreign and local currency debt plus ceiling for foreign currency bank deposits one notch from A1 to Aa3, in turn considered the fourth highest grade.

A report appearing at the Wall Street Journal attributed Moody's move to four major matters, namely: strong budgetary position, a resilient banking system, current account surplus and substantial foreign exchange reserves.

With projected spending of $144 billion (Dh528 billion), the kingdom's 2010 budget reflects continued determination to meet challenges posed by the financial crisis.

The figure shows growth of 14 per cent versus original spending level for fiscal year 2009. This spending level allows for a sizable deficit of $19 billion, representing nearly 5 per cent of gross domestic product (GDP) at current prices.

Such a shortfall is in violation of one criteria of Gulf Monetary Union (GMU) project. The GMU restricts budget deficit to 3 per cent of the GDP. Saudi Arabia, Kuwait, Qatar and Bahrain started implementation of GMU from 2010.

However, chances are the shortfall would largely be contained due to stronger oil income.

Though not released, it is assumed that Saudi authorities developed the 2010 budget using a conservative average oil price.

The petroleum sector is unique in the Saudi economy by virtue of contributing nearly three quarters of treasury income.

In fiscal 2009, the kingdom posted a deficit of $12 billion, down from a $17 billion projected figure despite increasing actual expenditures by $21 billion to $147 billion.

With regards to banking variables, a good number of Saudi banks weathered the worst effects of the global financial crisis, and National Commercial Bank, the largest Saudi bank by assets, saw its net profit doubling to $1.08 billion in 2009.

Major financial centre

Still, it seems that Saudi authorities are determined to turn Riyadh into a major centre for financial services on a global level through the King Abdullah Financial District (KAFD). Construction of KAFD started in 2007 with completion of the first phase expected by year-end. Among others, KAFD would house numerous entities dealing with financial matters including the bourse.

Officials are thinking big, comparing the project to that of Canary Wharf, London's business and banking district.

The project is being developed on a site comprising 1.6 million square metres in northern Riyadh. In comparison, London's Canary Wharf is built over 345,000 square metres.

At the same time, Saudi Arabia enjoys surpluses in its international dealings, showing current account and trade balance surpluses of $203 million and $1,033 million respectively in 2009.

Certainly, oil prices play a key role in actual current account and trade balance results, as the petroleum sector accounts for nearly 90 per cent of export earnings and 40 per cent of gross domestic product (GDP).

According to the BP Statistical Review of World Energy, Saudi Arabia is the world's largest exporter of crude oil, with sustained output of nearly 10 million barrels per day.

In addition, Saudi Arabia boasts some $410 billion in foreign exchange reserves. This is a sizable figure by virtue of exceeding the country's GDP of $385 billion in 2009.

In reality, Saudi authorities reported a 22 per cent drop in nominal GDP due to adverse developments in the petroleum sector reflecting lower average oil prices in 2009 versus 2008. Certainly, international agencies and investors appreciate this kind of transparency.

Clearly, upgrading of Saudi Arabia's economy is well-deserved judging by economic results of 2008 and 2009. It remains to be seen what 2010 holds for the Saudi economy.

 

Dr Jasim Ali is Member of Parliament in Bahrain.