Amid a lethargic domestic economy brought about by prolonged global downturn, Saudi Arabia, in general, will experience growth, albeit slowly, with the government's “massive investment expenditure” serving as the “key driver” in 2009, the National Commercial Bank (NCB) said in its “Saudi Economic Perspectives” report for July 2009. Despite the perceived “major risk” over an extended global recession, the bank said fiscal policy remains strongly expansionary in 2009. Despite the projected decline in oil revenues, the Saudi government remains committed to increase spending and provide the much needed boost to domestic demand amid the global economic recession. The government budgeted SR475 billion for total expenditures in 2009, out of which SR225 billion has been allocated to capital expenditure. The budget prioritizes capital spending in key areas, like education, healthcare and infrastructure, which is consistent with the government's objectives to create job opportunities and support economic growth and development in the medium-term. The government tends to overshoot the budget, and this is even more likely to happen this year to counter the impact of the global crisis. Although budgeted expenditure is higher for 2009 than it was in the 2008 budget, it is around 7 percent below what the government actually spent last year. We therefore estimate that actual expenditures will increase by around 10 percent to SR563 billion in 2009. However, the bank noted that with lower oil revenues, the government will probably exercise some restraint in current expenditure to provide some fiscal room for capital expenditure. “We estimate that current expenditure will increase by only 1 percent, while capital expenditure is projected to increase by around 33 percent over the actual levels in 2008. Outside of its budget plans, the government also announced that it will inject an estimated SR55 billion into specialized credit institutions. We believe this is positive given the limited access to foreign capital and currently tight domestic liquidity situation,” the report said. It pointed out that government investment expenditure will play a pivotal role in sustaining economic growth this year based on (1) aggressive fiscal policy plans that emphasize capital expenditure, (2) indirect fiscal liquidity injections to facilitate investments via specialized credit institutions and (3) additional steps undertaken by the public investment fund (PIF) to provide funding for major infrastructure and industrial projects. On the expenditure side, investment and private consumption were the main sources of growth in recent years, the report explained. “This was supported by a broad range of structural reforms to increase market openness, enhance competitiveness and diversify the economy base. Investment, both private and public, increased from about 25 percent of GDP in 2007 to nearly 30 percent of GDP in 2008.” Nonetheless, the outlook for private investment and consumption, along with net exports as drivers of real GDP growth has weakened significantly this year. As a result, the report said, private consumption will decline, as the fall in oil prices and weak labor market conditions erode income levels, while the plunge in global and local equities trigger negative wealth effects. It is also likely that private investments will decline sharply as a result of tighter financing and falling demand, it further said, adding that the fierce blow to business confidence levels will result in a number of projects being delayed and/or cancelled. Investment expenditure plans will focus on domestic demand as the Kingdom is comfortable with the current oil price. The bank said if oil prices stay in the $65-70 range through end-2009, “we believe that Saudi Arabia will be in a comfortable position to go ahead with its expenditure plans without incurring a fiscal deficit this year.” Traditionally, the Saudi government presents conservative budget revenue estimates based on low oil prices. The 2009 budget forecasts total revenues of SR410 billion, of which 85 percent is expected to come from oil. Meanwhile, growth in the non-oil sector will decelerate, the report noted, but is forecast to recover in 2010, the bank said. Real non-oil GDP in 2008 grew by around 4.3 percent but is expected to moderate to 2.3 percent in 2009, reflecting spillovers from the global financial turmoil and economic slowdown. The retail sector, growing at an annual average of around 5 percent in the last five years, is expected to slowdown due to falling consumer confidence. The construction sector, which has been growing rapidly in recent years, is also expected to slow down given tight financing conditions. However, falling prices of building materials and infrastructure projects contracted by the government will continue to provide some support for construction activities in 2009. Transport and telecoms, the fastest growing sector in 2008 at around 12 percent, will likely decelerate due to slower growth in subscription, intensifying competition and scale back in foreign operations this year. Aside from the effects of higher financing costs, activity in the manufacturing sector is expected to be less buoyant this year, given weak global demand prospects and excess production capacity. The financial sector, which grew by 3.5 percent in 2008, is also going to slow down, given the fall in bank lending activities and the massive decline in equities and other asset classes owing to the global financial crisis. Real non-oil GDP growth is expected to rise again in 2010, provided that the global economy does not fall into a protracted recession and the government maintains an expansionary fiscal policy to stimulate domestic demand. __
