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Oct 01 2010

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Saudi Arabia financing: Bullish

Mohammed al-Jasser, the governor of the Saudi Arabian Monetary Agency ( SAMA , the central bank), has forecast relatively robust growth of 3.5% for 2010, after an anaemic performance last year. This outlook is in line with the Economist Intelligence Unit's forecast, which envisages the Saudi economy growing by 3.7% on average between 2010 and 2014.

Mr Jasser was speaking following the formal presentation SAMA 's 2009 annual report to King Abdullah bin Abdel-Aziz al-Saud. The report said that the kingdom's real GDP growth was 0.6% in 2009, compared with 4.2% in 2008, with the oil sector shrinking by 6.7%, while the non-oil sector grew by 3.8% compared with 4.3% in 2008. The services sector contributed some 37.9% to the kingdom's GDP in 2009, compared with 27.9% in 2008, as lower crude oil prices and output reduced the contribution of the primary sector, while overall government spending reached a record high of SR596.4bn (US$159bn). This resulted in a provisional budget deficit of SR87bn for 2009, substantially below the record SR581bn surplus the kingdom achieved in 2008.

Annual inflation fell to 5.1% in 2009 from 9.9% in 2008, although prices have inched steadily higher over the course of 2010. The most recent figures from the Central Department of Statistics indicated that the cost of living index rose by 6.1% in the year to August 2010, its seventh consecutive monthly increase. The wholesale price index, which measures the cost of a range of raw materials, foods and manufactured products, actually fell by an annual 3% in 2009 according to the report.

Jobless rise

SAMA has also provided figures on unemployment, which it said was 10.5% amongst Saudi nationals in 2009, slightly higher than the 9.8% in 2008. The data reported that unemployment was just 0.3% amongst non-Saudis, mainly as foreign nationals without full-time employment are theoretically not permitted to be resident in the country.

Total bank credit by type of economic activity fell by 1.4% in 2009 to SR737bn, with the 'miscellaneous' category accounting for the single largest proportion of credit, at 38.9% of the total ('commerce' was the second-largest, at 23%). Net lending by specialised government institutions increased in 2009, rising by 13% against 2008, although only because lending by the Public Investment Fund, which is part of the Ministry of Economy and Trade, more than doubled from SR6.2bn in 2008 to SR13.4bn in 2009. Lending by other institutions, including the Saudi Credit and Savings Bank, the Agricultural Development Fund and the Real Estate Development Fund, all fell in 2009. There has been an accelerating recovery in bank lending so far in 2010, according to the most recent data from SAMA

EIU view

The Economist Intelligence Unit forecasts that Saudi Arabia's economy will grow by an average of 3.7% a year in 2010‑14. Oil output policy will remain a key determinant of overall economic growth and a source of uncertainty, given the potential for volatility in international oil markets. The government has some ability to offset this risk by pursuing a counter-cyclical fiscal policy using the savings it has built up in recent years. However, it has tended to exacerbate business-cycle volatility by ramping up spending dramatically in years of strong oil prices. Growth in the non-oil private sector is forecast to pick up over the forecast period, averaging 3.9%, as it recovers from a tightening of bank lending (following the default of two major Saudi conglomerates) and as foreign direct investment (FDI) rises. Government spending, subsidised credit and public-sector contracts will support growth in this sector.

In terms of demand components, private consumption is forecast to expand, underpinned by strong population growth and by expansionary fiscal and monetary policies. However, it will be lower than the historical period owing to credit being harder to obtain, lower levels of foreign investment and persistent high unemployment. The economy will be heavily supported by extensive government spending and by a public sector that continues to absorb a large proportion of job market entrants. Therefore, government consumption will rise in 2010-11 before falling slightly in the remainder of the forecast period as private-sector growth accelerates.

The government will also drive strong increases in investment, which is likely to grow faster than any other expenditure component over the forecast period. Private investment growth will be stimulated by a number of projects already planned or under way. There are plans for US$373bn of new public investment in 2010-14. Foreigners will be an important source of investment, and inward FDI has remained relatively strong despite the weak global climate. Export volumes largely depend on oil production policy and are expected to grow steadily over the forecast period. Import volume growth will be stimulated by demand from ongoing construction projects and a reliance on imports to meet many consumer needs.

Inflation is edging up

We expect inflation to average 5.7% in 2010, up from 5.1% in 2009 but broadly in line with the 6.1% year-on-year figure recorded in August. Inflation slowed following the 2009 global and local economic slowdown but is now likely to increase steadily, mainly driven by rises in food, rental and electricity prices. Housing shortages are likely to stem the slowdown in rental price rises and higher international food prices are likely to drive inflation in 2010-11. The link between interest rates and inflation is weak (as consumer debt levels are relatively low and are capped by the government), and inflation is contained largely through subsidies. There is a risk of a renewed inflationary spike, as in 2008, given the weakness of the policy tools available to contain inflationary pressure. A weakening dollar, and thus Saudi riyal, will add to the risk of imported inflation during the forecast period. These factors suggest that inflation will be higher in 2010-14 (when we expect it to average 5.6%) than in 2005-09 (when it averaged 4.4%).