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Saudi economic outlook sound in face of external stress
Saudi Gazette
Published in The Saudi Gazette on 15 - 06 - 2010

Saudi Arabia's economic outlook for the second half of 2010 remains sound, despite uncertainty from the European debt crisis, as the government-financed infrastructure expansion gains momentum, Banque Saudi Fransi said in its report on Saudi economy for June.
The bank's research team headed by chief economist Dr. John Sfakianakis forecast that the Kingdom would maintain its gross domestic product growth at 3.9 percent this year.
The economists raised the government sector's growth projection to 4.6 percent from 4.1 percent, saying the sector is poised for its fastest growth in 13 years as it acts as the key financier of strategic projects now that bank private sector loan growth remains subdued. “We believe sufficient domestic catalysts exist to support a reasonable economic recovery this year, despite tenuous global circumstances,” the economists said. They, however, said oil sector expansion looks set to be slower than expected, and reduced expansion forecast for the sector to 3.7 percent from 4.1 percent.
The economists also revised their annual oil price forecast to $76 a barrel from $78, suggesting a period of price weakness in the second half of the year.
With oil above $70 a barrel, Saudi Arabia stands poised to post a budget surplus for the year, although it is likely to be smaller than our January assumption of SR77.9 billion, or 4.8 percent of GDP.
Should oil prices hold above $75 a barrel, state spending would far exceed projected budget outlays, but if it falls below this level, the probability is that the government will strive to reign in spending to as close to budget allocations of SR540 billion as possible.
State spending to push forward strategic energy, transportation and utilities projects is integral following such high-profile pullouts as the ConocoPhillips withdrawal from the Yanbu refinery project. As a result, a fiscal surplus of 3 percent of GDP looks more likely this year.
As European debt crisis contagion threats loom, “we have argued that Saudi Arabia is largely shielded from the fallout by virtue of the fact that its banks' exposure to Europe is limited. Differentiation among Gulf states continues,” the report said.
However, the implications of the risk aversion attitude have already begun playing out. Saudi Basic Industries Corp (SABIC) decided in May to delay a bond sale as Europe's debt crisis sent emerging market borrowing costs to many-month highs.
Given the sound fundamentals, “we are maintaining our 3.9 percent 2010 GDP growth forecast, although we now expect the oil sector will expand 3.7 percent, down from our earlier estimate of 4.1 percent, based on oil and gas investments rather than output changes,” BSF said in the report.
The private sector, meanwhile, is being hit by deleveraging, volatile global confidence, downward pressure on global and local equities, and a lack of local and international financing. “While we are keeping our private sector GDP growth forecast steady at 3.7 percent, we have decided to raise our government sector GDP forecast to 4.6 percent for 2010, up from a previous estimate of 4.1 percent.”
The government is shouldering the recovery effort, acting as the key financier of strategic projects as bank private sector loan growth remains subdued. In 2009, the government sector accounted for 23.1 percent of GDP, which is forecast to rise slightly to 23.3 percent this year as the private sector's share falls very slightly to 47.9 percent. Oil sector GDP should account for 27.7 percent of GDP, according to our estimates. In the 2010 budget, this expansionary stance culminated in a 13.7 percent rise in projected state expenditures to a record level of SR540 billion - marking the largest budget in Saudi history.
Saudi Minister of Finance Ibrahim Al-Assaf indicated in May that the country would strive to stick with its budget spending target as much as possible. The government projected a budget deficit for a second year of SR70 billion in 2010. In our view, government expenditures should come in at SR588 billion this year, indicating overspending on the budget of 9 percent. “We are revising our surplus forecast for 2010 to SR49 billion, 3 percent of GDP, from a prior forecast of 4.9 percent. Total government revenue is likely to be SR637 billion. We also expect a slow turnaround in foreign direct investment this year.” FDI flows dropped 73 percent in 2009 to SR39 billion, the lowest level of the past five years.
According to the Saudi Arabian General Investment Authority (SAGIA), 69 percent of FDI went to refined petroleum, chemicals, contracting and real estate. The Eastern Province received 39 percent of the 2008 FDI, the western region 30 percent, the central region 18 percent, and the north and south 2.5 percent. In view of the domestic drivers and upward revisions in official 2009 headline GDP as well as nonoil private sector and government economic growth rates, GDP growth is forecast at 3.9 percent in 2010, climbing to 4.2 percent in 2011. “We have, however, decided to cut down our oil sector expansion forecast to 3.6 percent, while raising our projection for government sector GDP growth to 4.6 percent.”
This would be the fastest pace of growth for the government sector in 13 years as the state fires on all cylinders to meet fiscal outlay targets, the report noted.
While oil export and non-oil export revenues will rise modestly in 2010 and 2011, import costs are also climbing as the Kingdom places greater reliance on foreign-produced foodstuffs, manufactured goods and building materials, a natural result of expansionary spending. This, along with a notable rise in workers remittances and other transfers out of the country, is likely to level pressure on the Saudi current account balance in the medium term, compelling us to reduce our forecast for this year's current account surplus.
The average price of oil, which exceeded $80 a barrel in March and April, fell to $74 a barrel in May having dropped to the mid-$60 level, and is poised to have another volatile month in June. “We are revising our annual oil price forecast to $76 a barrel from $78, leaving some room for a period of price weakness in the second half of the year.” Crude prices averaged $79 a barrel in the first five months.
The GDP growth forecast at 3.9 percent stays, the report said, despite the likelihood that oil sector expansion looks set to be slower than earlier anticipated, with total oil production averaging 8.35 million barrels a day. OPEC is unlikely to raise output targets this year - and could go the other way should oil prices suffer prolonged declines of below $65 a barrel. The $15 drop in the WTI oil price since early April reflected a healthy correction of inflated prices given weak economic fundamentals. The overall oil supply/demand balance is likely to remain fragile through to the end of the second quarter. Non-oil government and private sector participants will steer most of the economic growth in 2010.
New data of the Central Department of Statistics and Information (CDSI) show the government has revised 2009 real GDP growth to 0.6 percent from 0.2 percent as the global economy shrank 0.6 percent. Other than the kingdom, only a few G20 nations posted economic growth in 2009: Argentina (0.9 percent), Australia (1.3 percent), China (8.7 percent), India (5.7 percent) and Korea (0.2 percent). 0 The private sector's rate of growth, however, was a full percentage point faster than prior state estimates, reaching 3.5 percent last year, according to CDSI. This change resulted both from slightly higher 2009 private sector output and a downward revision in private sector GDP in 2008.
The non-oil GDP growth rate fell to 4.6 percent in 2008 - down from 5 percent previously - which helped adjust the 2009 figure. Virtually non-existent bank credit, private sector deleveraging and lower imports no doubt weighed on the sector's growth in 2009. However, the correlation between bank lending and private sector growth is not linear; the capacity of the private sector to draw on its own internal capital resources, accumulated during years of high economic growth, was likely higher last year than initially assumed. Saudi bank credit soared 27 percent in 2008 and private sector expansion was only 1.2 percent faster than it was in 2009, when bank claims on the private sector contracted slightly.
“Hence, the propensity of private firms to draw on existing capital resources was likely high. A good deal of this can also be explained by looking at the supplementary role played by state-run specialized credit institutions in the last year and a half in providing liquidity to the economy when bank credit could not keep up,” BSF said.
Through these agencies, the state has given contractors 20 percent advance payments, supporting bank credit. Specialized credit institutions provided SR24.9 billion in liquidity in the first nine months of 2009 compared with SR30.6 billion in 2008, when allocated credit almost doubled 2007 levels. Some 52 percent of the funds were allocated to the Public Investment Fund (PIF), while 21 percent went to the Saudi Credit and Savings Bank, 16 percent to the Real Estate Development Fund (REDF) and 9 percent to the Saudi Industrial Development Fund (SIDF), the balance being directed to the Saudi Agricultural Bank. The credit extended by PIF, REDF and SIDF have the greatest project multiplier potential, it noted.
There was also a notable gain in non-oil government sector expansion in 2009 to 4.4 percent in revised data, up from a prior estimate of 4 percent due to substantial investments undertaken by the state in 2009, when the government overspent its budget by 16 percent.
While oil sector and private sector gross fixed capital formation contracted 11 percent and 2.2 percent, respectively, last year, government capital investments grew 8.9 percent.


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