JEDDAH: Saudi Arabia's economy will grow by around 4.2 percent in 2011 as crude prices and production head higher, Riyadh-based Jadwa Investments forecast. "We forecast that economic growth in Saudi Arabia will rise to 4.2 percent in 2011 from 3.8 percent in 2010. Growth in both the oil and non-oil sectors will pick up. Oil production is forecast to respond to rising demand from emerging economies. High government spending will remain the main driver of the non-oil economy, supported by greater bank lending, very low interest rates and improving consumer and corporate confidence," Jadwa said in a study. The Saudi economy has gained momentum through 2010. It said indicators of consumer spending, such as point of sales transactions and cash withdrawals from ATMs, led to healthy growth during the year. Jadwa put real GDP growth 3.8 percent in 2010, far above the 0.6 percent rate achieved in 2009. The report also said the non-oil sector would drive growth in 2011, while inflation will remain relatively high at around 5.3 percent because of a surge in rents and commodity prices. "Non-oil growth will still be below that of the boom years around the middle of the last decade owing tougher credit conditions and a weaker global economy. Government expenditure will be vital to the economy." The report further forecast government investment spending to edge down slightly through 2011. "Government investment spending is budgeted at SR256 billion for 2011, the equivalent of as high as 15 percent of GDP," it said. "Although this level of spending is not expected to be attained, spending around our forecast level of SR170 billion will provide a huge stimulus to the economy and ensure another very good year for government contractors," it noted. Moreover, the study said "lack of availability of suitably priced bank credit has been the major factor holding back much of the non-oil private sector." "Total bank credit to the private sector climbed by only six percent in the first 10 months of 2010, following average annual growth of 27 per cent between 2004 and 2008. Credit growth should pick-up in 2011." The recovery in bank credit, according to Jadwa, was due to the improvement in the economy and the fact that bank provisioning for bad loans has sharply increased and is likely to exceed 100 percent of total non-performing loans by the end of 2010. "This should give banks greater reassurance about their own financial positions …. another factor is that the low investment returns available elsewhere means the lack of lending is hitting bank profits," the report said. "Demand for credit from the private sector will also increase. Better bank performance should trigger an improvement in the stock market, which has an important impact on consumer confidence." Cement sales, a good gauge of construction activity, were 13 percent higher in the first 10 months of 2010 than they were in the same period of the previous year. "Furthermore, the performance of listed companies continues to improve, with profits up by 19 percent year-on-year in the third quarter. Finally, surveys point to an increase in new orders for local businesses. Given the strengthening fundamentals of the economy, we expect growth to accelerate in most sectors." A breakdown showed growth is estimated at 4.2 percent in the private sector, 3.5 percent in the oil sector, and five percent in government services. Jadwa projected growth at 5.5 percent in manufacturing, 6.5 percent in electricity and water, 4.5 percent in construction, nearly 4.8 percent in wholesale and retail trade, about five percent in transport and communication, 2.1 percent in finance, and around one percent in agriculture. On inflation, the study projected the rate to remain relatively high, averaging around 5.3 percent in 2011, little changed from the 5.4 percent rate in 2010. It said rents would remain the main source of inflation while other inflationary pressures will be external, principally in the form of commodity prices. "Domestically-driven inflationary pressures should still be fairly subdued, though there is a risk of a gradual increase in inflationary expectations. Although inflation will be well above the historical average, we do not think any new policy steps will be taken to tackle it," the report said. "Rents have been the main source of inflation since early-2007 and we do not expect this to change in 2011. However the growth in rental inflation has stabilized at around nine percent over the past six months, down from a high of almost 20 percent in mid-2008….we think rental inflation will continue to hover close to 10 percent during 2011."
