Saudi Arabia, which holds the world’s largest proven crude oil reserves, is going through political and economic reforms. In the last few years, the Kingdom has benefited from the increased oil prices, which has resulted in higher economic growth, improved government finances and increased GDP growth. The Kingdom enjoys a strong trade surplus largely due to its large oil exports. In fact, trade prospects are looking up, as the industrial sector has been receiving strong support from the government in a bid to reduce dependence on oil revenues. Buoyed by improving macroeconomic parameters, the Saudi Market TASI index has outperformed most other global indices. These are among the highlights of the Kuwait-based Global Investment House’s (GIH) first report on the Economic & Strategic Outlook of the Kingdom. Arab News serializes the report in three parts, beginning with the first part today. The report’s second part will appear tomorrow and the concluding part on Tuesday.

Macro Economic Profile

Saudi Arabia possesses the world’s largest proven crude oil reserves estimated at around 262.8 billion barrels, which is around a quarter of the total world oil reserves. The oil sector contributed to around 37 percent of the GDP of the country in 2002, while exports of crude oil and refined products accounted for around 88 percent of the country’s total exports during the year. The government also derives most of its revenues from this sector. Oil revenues accounted for around 78 percent of government revenues in 2002.

The Kingdom is going through political and economic reforms. Elections to the municipal councils are schedule to be held in 2004. The country has also embarked on economic reforms and taken several steps to encourage private and foreign sector investments and privatization of state enterprises. The ongoing economic and political reforms are expected to give a boost with increased investments in various sectors.

The GDP of the country in nominal terms stood at $188.5 billion as of 2002. In real terms, the GDP growth during the year was marginal at around one percent. However, with oil prices ruling firm and output expected to be significantly higher we expect a much higher growth in GDP in the current year.

In the last few years the Kingdom has benefited from the high oil prices, which has resulted in higher economic growth and improved government finances. In the current year prices of crude oil have remained high on account of various factors such as the Iraq war and the disruption of production in Venezuela and Nigeria. Oil prices have continued to remain firm in the post-Iraq war period on account of the delay in the restoration of supplies from Iraq. The disruption in supply from some major exporting countries such as Venezuela, Iraq and Nigeria resulted in the Kingdom making up for the shortfall by utilizing its excess capacity.

The estimated fiscal deficit for 2002 was at SR21 billion, much lower than the expected budgeted deficit of SR45 billion despite higher than budgeted spending by the government. Given the buoyant trends in oil prices and the higher oil export volumes, the fiscal position of the Saudi economy is expected to improve in 2003.

The total exports of Saudi Arabia stood at $71.7 billion during 2002, while its total imports stood at $29.6 billion, resulting in a merchandise trade surplus of $42.1 billion for the year. After accounting for non-merchandise outflow of funds on account of services and transfers such as repatriation of funds by expatriate workers, the current account surplus stood at $11.7 billion for 2002.

Despite the steady growth in money supply over the years, inflation in Saudi Arabia has been well under control.

Buoyed by improving macroeconomic parameters, the Saudi market TASI index has outperformed most other global indices. In the first nine months of 2003, the TASI index gained 69.8 percent.

GDP

Saudi Arabia’s economy has recorded moderate growth in the last couple of years. After posting a strong growth in 2000, the growth rate has slowed down in the last couple of years. Between 2000 and 2002, Saudi Arabia’s nominal GDP has remained largely unchanged, while the real GDP grew at a CAGR of 1.2 percent. Real GDP growth, which reached a peak of 4.9 percent in the year 2000, has subsequently declined to one percent in 2002.

The contribution of the oil sector has declined from 40.9 percent in 2000 to 37.1 percent in 2002, which was largely on account of the decline in oil prices during the period. The share of the non-oil sector in Saudi Arabia’s GDP has increased to 40.5 percent in 2002, while the share of the government sector has increased marginally to 21.3 percent in 2002.

The Saudi GDP at current prices has remained relatively stagnant over the last three years. However, the oil sector has declined by 4.8 percent CAGR during the period, while the non-oil private sector has grown at 3.9 percent CAGR during the same period.

Aside from the oil & gas sector, the major contribution to the GDP was from the finance, insurance, real estate and business services sector (11.6 percent) followed by the manufacturing sector (10.3 percent).

The industrial sector receives strong support from the government as a part of its policy to reduce dependence on oil revenues. In the last three years, the industrial sector received nearly $7.5 billion in investments.

Public Finance

The Ministry of Finance’s preliminary estimates of revenues for 2002 were at SR213 billion, about 36 percent higher than the budgeted revenues of SR157 billion.

Though actual total revenue witnessed growth in 2002 over budgeted revenue, it declined over the preceding year, due to the decline in oil revenue in 2002 over 2001. In 2002, the share of oil revenue was at 78 percent and the share non-oil revenue was at 22 percent as compared to 80.6 percent and 19.4 percent, respectively in 2001. The deficit for the year 2002 was lower at SR21 billion as compared to SR27 billion in 2001.

Higher oil exports and prices

to boost revenues

The budgeted expenditure for 2003 is SR209 billion, while budgeted revenues are SR170 billion. resulting in a budget deficit of SR39 billion. The budgeted estimates for revenue are higher by 8.3 percent, while total expenditure are higher by 3.5 percent over those of the preceding year’s budget. The budget deficit is estimated lower at SR39 billion as compared to SR45 billion budgeted for 2002.

Budget Allocations

The state budget for 2003 envisaged financing of new projects and programs in the areas of water, municipal services, roads and infrastructure developments. Four sectors, defense & national security, human resources development, public administration, public utilities & general items and health services & social development account for 87 percent of the total budgeted expenditure for 2003. The sectors which witnessed increased allocation in 2003 budget over 2002 budget, are human resources development, transport & communication, economic resources development, defense & national security, public administration, public utilities & general items and domestic subsidies.

(To be continued)