The report, however, said that the Kingdom's real GDP (gross domestic product) growth is expected to fall by around 1 per cent this year as a contraction in the oil sector is projected to offset moderating growth in the non-oil sector. It added that real GDP growth is forecast to increase by 3 per cent in 2010 based on a recovery in global demand conditions and a higher oil production level. According to the report, between 2003 and 2007 real GDP growth averaged around 5 per cent a year, the strongest growth in a decade, and up strongly from the 2.5 per cent annual average growth during the 1990s.

Last year, real GDP growth was estimated to have reached 4.5 per cent, largely driven by strong private and public investment expenditure on the back of record oil prices and abundant liquidity. However, the NCB report said the economic growth outlook for 2009 had deteriorated sharply because of the global financial crisis and economic recession. Although Saudi Arabia has been less affected by the financial crisis, the indirect impact on the real economy will be significant. There are three main channels through which the global crisis is spreading to Saudi Arabia: substantially lower oil prices are shrinking the main source of government revenue, (ii) weaker global demand for oil has motivated drastic Opec production cuts and (iii) tighter credit and investor risk aversion in international markets have led to a shortage of foreign capital, a massive decline in local asset prices and lower investment.

Saudi Arabia is still dominated by the oil sector, which in 2008 accounted for about 32 per cent of real GDP. Oil export revenues represented about 90 per cent of total exports and government revenues. Oil also plays an important role in supporting other major industries, such as petrochemicals, steel, aluminum, power generation, water desalination and other energy-intensive industries.

Saudi Arabia is therefore vulnerable to the recent negative oil price shock, which brought down Arab light prices from a high of $142 a barrel in mid-2008 to an average of about $53 a barrel so far in 2009. "With substantially lower oil prices and reduced production level, oil revenues are expected to fall by over half in 2009. This will have adverse implications for the economy?s fiscal and external positions," said Said Al Shaikh, chief economist at NCB.

Moreover, real oil GDP will contract by around 8 per cent this year, and so the sector's contribution to overall economic growth will be unarguably negative. Next year, the contribution of the oil sector to economic growth should turn positive but will remain modest, as Saudi crude oil production is expected to increase by an average of only 400,000 barrels per day.

The report said that real non-oil GDP in 2008 grew by around 4.3 per cent but is expected to moderate to 2.3 per cent in 2009, reflecting spillovers from the global financial turmoil and economic slowdown. It added that the Saudi retail sector, growing at an annual average of around 5 per cent in the last five years, is expected to slow down due to falling consumer confidence.

The construction sector, which has been growing rapidly in recent years, is also expected to slow down due to tight financing conditions. 

© Khaleej Times 2009

 

Community Comments (1) - Comment on this article

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by Peter Cooper, Editor, Arabianmoney.net - 02-Aug-09
Yes but a more diversified and open economy with more foreign direct investment would have undoubtedly performed even better. [Report Abuse | Email to a Friend | Reply to this Comment]

 

 

 

 

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