Saudi Arabia's proactive approach to policy-making helped the country's economy avert the worst from happening in financial crisis, said Dr. Jarmo Kotilaine, Chief Economist of NCB Capital. Dr Kotilaine was one of the speakers at the Euromoney Saudi Arabia Conference that opened in Riyadh, Tuesday. In the face of the deepest global recession since World War II and an unusually sharp oil price cycle, the Saudi economy is estimated to have expanded by a modest 0.15 percent in real terms in 2009, largely driven by the non-oil sector which expanded by 3.0 percent. “Growth is on track to return to the trend rate of roughly four percent in 2010, which highlights the remarkable macroeconomic stability of the Kingdom, its healthy financial sector and the effectiveness of the authorities in managing the implications of the country's continued oil dependency,” he said. He said the economic growth in Saudi Arabia was impressive compared to economic contraction in most of the developed world. In its unwavering commitment to macroeconomic stability, he said the Saudi government effectively mobilized its surpluses to support the economic activity. “This proactive approach to policy-making helped the Saudi economy avert the worst of the crisis,” he said. Dr. Kotilaine believed that a number of identifiable long-term constraints on future economic growth in the Kingdom offer some of the most compelling investment opportunities in the region and benefit from a strong political commitment to address them. “In spite of impressive track record of resilience and growth, the Saudi economy faces important challenges in the future. Efforts to address these structural growth constraints and to ensure the transition of the economy to its post-hydrocarbons future are well underway, however, and promise to constitute key elements in the continued diversification of the economy and the development of the financial sector,” he said. To ensure continued stability and growth the chief economist highlighted a number of areas, which he said required decisive action. He said the government should consider the following points that include continued conservatism in economic policy to counter sharp cycles and structural drivers of inflation. Managing the Kingdom's oil resources is becoming increasingly critical in the face of mounting domestic demand and emerging new sources of supply such as Iraq Food and water resources are scarce ad demand, supported by subsidies, internationally high and rapidly rising Effectively educating and mobilizing the exceptional pool of human capital - the Kingdom's large young population - will be vital and an enormous opportunity Boosting the living standards of the population through new job opportunities and improved access to housing will be essential. Dr. Kotilaine described these as “not insignificant issues” but believed that the Saudi government has a number of identifiable options and is already embarked on addressing many of the constraints. He suggested a number of key drivers saying that the government is pushing forward with diversification and efforts to promote private sector-led growth. A modern infrastructure is needed to support industry, housing, and transportation. A key element to this factor involves ensuring proper and sensible access to water, food, and energy where the pipeline of investments already exceeds $120 billion, he said. He said while dollar-riyal peg has served the Kingdom well, the business cycle is diverging from the US and the growing global stature of Saudi Arabia will necessitate greater policy autonomy. The Gulf Monetary Union (GMU), which is likely to become a reality this decade, provides the most logical opportunity for a gradual transition, he said. The Kingdom also needs to overhaul fiscal regime and encourage foreign investment. He said the demographic profile of Saudi Arabia, with a median age of 21.5 years, represents both an urgent challenge and an exceptional opportunity. “The issues are identifiable and the Saudi government has been taking a proactive approach to policymaking in many areas. We believe that addressing these constraints will not only unlock the Kingdom's long-term growth potential but also generate exceptional investment opportunities in a number of sectors,” he said. Saudi banks will resume “normal business” this year after difficult conditions following the global downturn forced local lenders to increase provisions in 2009, the central bank governor said on Tuesday. Muhammad Al-Jasser of the Saudi Arabian Monetary Agency (SAMA) also said economic conditions in the Kingdom, the world's largest oil exporter, did not warrant a change in monetary policy yet. “The fact that our banks have increased provisions is a sign of their ability to clearly recognize losses and hence strengthen their balance sheets for resumption of normal business in 2010,” Jasser said in a speech at a financial conference.
