According to the National Commercial Bank's (NCB's)National Commercial Bank's (NCB's) latest report about Saudi Economic Perspectives, the persistent current and fiscal account surpluses along with the build up of a sizable net foreign asset position has significantly reduced the vulnerability of the Saudi economy to negative terms of trade shocks and sudden fiscal retrenchment. In addition, the resilience of the banking system to systemic shocks has also improved sharply.

The Kingdom's real GDP growth is expected to accelerate to 5.1 percent this year in line with increase in crude oil output, while private investment in the non-oil sectors is expected to gather pace. The oil sector remains the core of economic activity in Saudi Arabia, providing the financial underpinning for government expenditure plans and broader economic confidence.

Despite oil production cuts in late 2006 and early 2007, real GDP growth slightly increased to 3.4 percent in 2007 from 3.1 percent in the previous year.

The NCBNCB report said with higher crude oil output and investment in production capacity, real oil GDP is set to increase by around 5.6 percent this year, providing a significantly positive contribution to overall growth while, real non-oil GDP to increase by around 4.8 percent.

Based on the fundamentals and intensity of speculative oil investment, Saudi oil output to increase to 9.3 million barrels per day in 2008, and Saudi crude oil prices to average around $100 a barrel, up by nearly 46 percent from the previous year. Consequently, this will have a positive impact on the Saudi economy in 2008.

The report added Saudi Arabia's export revenues to increase by 26 percent to a new record of around $259 billion in 2008. Non-oil exports are also expected to be strong this year, but will grow at a slightly slower pace of around 8 percent to $30 billion.

Nevertheless, total exports are forecasted at around $289 billion in 2008, compared to $233 billion in the previous year. Imports are expected to grow by 11 percent to $92 billion in 2008, which is the largest in recent years.

Accordingly, the current account surplus to reach an all-time high of $138 billion in 2008, much larger than the $95 billion in 2007, but relative to GDP it will stand at around 28 percent in 2008. The economy's robust external position will be reflected in higher net foreign assets this year. In 2007, these assets grew by 30 percent to $312 billion, and had reached $365 billion by May this year.

Because of higher oil revenues, the Kingdom's budget surplus is expected to soar in 2008. The budget surplus may reach SR565 billion in 2008, by far, larger than the SR40 billion that was released in the last budget. This is largely due to higher oil revenues, which are expected to reach SR997 billion, while non-oil revenues are forecasted at SR75 billion.

Said A. Al-Shaikh, chief economist at NCBNCB, said in the report that inflation in Saudi Arabia has become a major challenge in 2008, rising considerably to 10.4 percent in May, mainly driven by rents and food prices. Meanwhile, monetary policy easing by Saudi Arabian Monetary Agency (SAMA)Saudi Arabian Monetary Agency (SAMA) following the US Federal Reserve have pushed interest rates sharply lower, leading to increasingly negative real interest rates at a time when the economy is already expanding.

The Kingdom's money supply continued to expand at a rapid pace. By the end of 2007, money supply (M3) accelerated to 19.6 percent, the highest in recent years.

The report said Saudi Arabia is also on the verge of an unparalleled construction boom. Projects in excess of SR1.73 trillion are currently under way, all of which have significant construction components.

Strategic projects, such as the economic cities and industrial zones, oil & gas, petrochemicals, mining & minerals, transportation and utilities, have all been designed to leverage the Kingdom's comparative advantages; a low cost energy producer and a strategic geographical location to expand the non-oil economy, specifically the non-oil private sector.

Foreign direct investment (FDI) inflows into the Kingdom are expected to continue their steep rise this year. According to UNCTAD (United Nations Conference on Trade and Development), FDI inflows increased by 51 percent to $18.3 billion in 2006. However, the NCBNCB report said, FDI is driving overall investment spending in the Kingdom higher, as the share of FDI in gross fixed capital formation (GFCF) has increased significantly, from an average of 1 percent in 1990-2000 to a remarkable 32.1 percent in 2006.

By Khalil Hanware

© Arab News 2008

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