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Saudi economy to grow 5.5% in 2011

Growth will be fuelled by high oil prices and production by the Kingdom
A surge in oil prices will ally with hither output to boost Saudi Arabia's economy by nearly 5.5 per cent in 2011 while its current account and fiscal balances will record large surpluses, according to forecasts by a key bank in the Kingdom.

A survey of 693 business managers in Saudi Arabic conducted by Banque Saudi Fransi for the third quarter showed crude prices would likely average above $100 in the next six months while Saudi Arabia is expected to further boost its crude production to offset disruption of supplies from conflict-battered Libya.

Most of those polled in the survey said they expected Saudi Arabia's economy, the largest in the Arab world, to perform much better in the coming months, BSF said in a report sent to Emirates 24/7.

"Some 88.3 per cent of respondents expect the Saudi economy's performance will be 'much better' in the next six months as a result of the positive energy price environment, in addition to the likely revenue boost Saudi Arabia will get from raising production.....the remaining respondents said the economy would perform 'better'," BSF chief economist John Sfakianakis said.

"The Saudi economy is likely to grow 5.5 per cent this year, with the government posting twin fiscal and current account surpluses, according to our forecasts. Most of this....growth will come from the oil and government sectors, while private sector expansion should remain below trend levels."

BSF noted that in its survey for the second quarter, almost a third of respondents foresaw oil prices soaring to above $120 a barrel as political instability in the Middle East, particularly in Libya, raised the risk premium of oil prices. Brent prices did surpass $120 in April, while U.S. crude averaged $110 a that month.

Since then, oil prices have eased slightly - U.S. crude averaged $97.9 a barrel in the first three weeks of June- as Saudi Arabia pledged to increase production despite a disagreement among OPEC members over raising oil output.

The report showed Saudi Arabia's oil output climbed to about 8.8 million bpd in May and is likely to rise further this summer as OPEC's largest producer seeks to increase supply to Asia and temper oil prices.

"Even with new supply, respondents to the Q3 survey overwhelmingly expect oil prices will range between $100 and $120 a barrel in the next six months.

The biggest proportion of respondents at 51.4 per cent expects the price of crude will fluctuate within the $100-$110 band over the period," BSF said.

"A decent 28.4 per cent of respondents predict oil prices will fluctuate between $90 and $100 a barrel......oil prices and production levels provide a crucial gauge of confidence in the Saudi economy since the state derives almost 90 per cent of fiscal revenues from oil exports."

According to BSF , the positive oil price environment will make it easier for the government to finance a near SR500 billion, multi-year public investment programme unveiled by king Abdullah in the first quarter to support various social initiatives by creating jobs, building homes, raising wages, and paying out bonuses and unemployment benefits.

A one-time bonus paid out in the first half of the year to state and many private sector employees was initially expected to have wide implications on short-term inflation in the kingdom, although so far their affect has been muted, BSF said.

"Inflation in May fell for a ninth month to about 4.6 per cent, mostly due to reduced pressure on rents and lower food inflation....prices still have the potential to pick up toward Ramadan."

The survey showed some 47.9 per cent of the respondents said they expected inflation to rise over the forecast period (versus 52.8 per cent in Q2), while 28.6 per cent expect the rate of inflation to stay the same.

© Emirates 24|7 2011