Kingdom’s GDP seen at healthy 6% in 2012

Updated 11 September 2012

Kingdom’s GDP seen at healthy 6% in 2012

JEDDAH: The global economic picture is expected to remain murky in H2, 2012, as major economies continue to tread water without some discernible uptrend. Employment growth will curtail as Europe grapples with austerity and American businesses maintain tight purse strings. In this context, the International Monetary Fund (IMF) expects Europe to contract -0.3 percent in 2012, followed by a modest +0.7 percent growth in 2013. Chinese growth is expected to significantly slowdown in 2012 to +8.0 percent from +9.2 percent in 2011. Saudi Arabia's GDP growth will be slower but still healthy at +6.0 percent in 2012, according to a report by Riyad Capital.
For 2013, although the IMF is expecting +4.1 percent GDP growth for Saudi Arabia, Bloomberg consensus forecast is +3.1 percent. Overall for the world economy 2013 should be better than 2012, however skepticism is growing fueled by the uncertain future for the euro and its unpredictable impact.
Oil prices
Given the weaker economic environment, oil price moved from a high of about $110 a barrel to a low of $78 a barrel in the first half of 2012. In the past three months, prices staged a recovery and found support in the $85 to $95 range despite an absence of durable change in the economic environment. Price changes are partially a result of inverse movements of the US dollar, which gained strength against major currencies in early summer and subsequently eased.
The International Energy Agency (IEA) expects non-OECD oil demand to surpass that of OECD in 2013, comprising some 45.7 mbd out of the total 90.5 mbd. This, Riyadh Capital said has significant implications for oil exporters such as Saudi Arabia indicating a more diversified market for their product. If Western economies stagnate, oil demand will be supported through developing economies. Even with the interdependence of economies, we envision limited prospects of sustained declines in oil prices. Any correction will be welcomed through higher consumption. As such, Oxford Economics forecasts Saudi oil production to continue at +2.1 percent CAGR through 2020 reaching 11.7 mbd from the current 9.9 mbd. However, IMF forecasts highlight a troubling trend of declining revenues for Saudi Arabia over the next five years. Revenues are projected to decline from $351 billion in 2012 to $296 billion by 2017.
The report said employment growth for young Saudis has come under the spotlight in the past two years as more state resources are allocated to education and training programs. The total population is expected to register +2.1 percent CAGR through the next five years reaching nearly 32 million, providing an expanding retail target market for banks.
Job creation
Success at finding jobs for the young should provide meaningful boost in demand for banking products such as car and personal loans. The government has managed an expansionary policy in the past three years thanks to its SR 2.4 trillion foreign reserves to spur job and infrastructure growth. However the pace of that expenditure may come under pressure on declining revenues which could potentially curtail the effectiveness of some of the programs.
Low rates
The prevailing low rate environment pressured sector revenues in 2011 which showed signs of improvement in 2012 as volume compensated for yields. Riyad Capital expects rates to remain benign through 2013 inline with facilitative policy adopted by the US. This could render Saudi banks heavily dependent on volume growth to boost revenues, which in our view will become increasingly difficult. Consequently, banks will need to raise their risk appetite in search of yields. Second, with European debt markets rattled, yields on investment grade securities have hit record lows further squeezing banks' investment income. Compounded by dwindling supply of Saudi government bonds, the banks will need to source alternative vehicles to park liquidity such as high grade corporate issues and sukuk.

Record budget spurs Saudi economy

The budget sets out to lift spending and cut the deficit. (Shutterstock)
Updated 19 December 2018

Record budget spurs Saudi economy

  • “It is a growth-supportive budget with both capital and current expenditure set to rise.”
  • Government spending is projected to rise to SR 1.106 trillion

RIYADH: Saudi Arabia on Tuesday announced its biggest-ever budget — with spending set to increase by around 7 percent — in a move aimed at boosting the economy, while also reducing the deficit. 

However, analysts cautioned that the 2019 budget is based on oil prices far higher than today — which could prove an obstacle in hitting targets. 

Government spending is projected to rise to SR 1.106 trillion ($295 billion) next year, up from an actual SR 1.030 trillion this year, Minister of Finance Mohammed Al-Jadaan said at a briefing in Riyadh. 

The budget estimates a 9 percent annual increase in revenues to SR 975 billion. The budget deficit is forecast at SR 131 billion for next year, a 4.2 percent decline on 2018.

“We believe that the 2019 fiscal budget will focus on supporting economic activity — investment and wider,” Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB), told Arab News.

“It is a growth-supportive budget with both capital and current expenditure set to rise.”

A royal decree by Saudi Arabia’s King Salman, also announced on Tuesday, ordered the continuation of allowances covering the cost of living for civil sector employees for the new fiscal year.

“The continuation of the handout package will be positive for household consumption by nationals,” said Malik. “We expect to see some overall fiscal loosening in 2019, which should support a further gradual pickup in real non-oil GDP growth.”

World oil prices on Tuesday tumbled to their lowest levels in more than a year amid concerns over demand. Brent crude contracts fell to as low as $57.20 during morning trading.

Malik cautioned that the oil-price assumptions in the Saudi budget looked “optimistic.”

“We see the fiscal deficit widening in 2019, with the higher spending and forecast fall in oil revenue,” she told Arab News.

Jason Tuvey, an economist at London-based Capital Economics, agreed that the oil forecast was optimistic, but said this should not pose problems for government finances.

“The government seems to be expecting oil prices to average $80 (per barrel) next year,” he said. 

“In contrast, we think that oil prices will stay low and possibly fall a little further to $55 … On that basis, the budget deficit is likely to be closer to 10 percent of GDP. That won’t cause too many problems given the government’s strong balance sheet. 

“Overall, then, we think that there will be some fiscal loosening in the first half of next year, but if oil prices stay low as we expect, the authorities will probably shift tack and return to austerity from the mid-2019, which will weigh on growth in the non-oil sector,” Tuvey said.

John Sfakianakis, chief economist at the Gulf Research Center, based in Saudi Arabia, said that the targets of the budget were “achievable” and the forecast oil price reasonable. 

“It is an expansionary budget that should spurt private sector activity and growth,” he said. 

“With Brent crude averaging around $68 per barrel for 2018 and $66 per barrel for 2019, the authorities have applied a conservative revenue scenario.”