JEDDAH, 2 February 2004 — The Saudi economy in 2003 was “exceptional where oil is involved and solid elsewhere” says a report by the Saudi American Bank (Samba) in a report just released. “We expect strength to continue into 2004,” it said.
The Kingdom has been losing purchasing power with the dollar’s decline in value. Calculating on a trade-weighted basis, the riyal declined in value by 7.23 percent in 2003.
Non-oil private sector growth at 3.4 percent was below the average of four percent for the previous four years. Oil revenues were strong, government finances were better than budget projects, trade balances were healthy despite a depreciation of the dollar-pegged riyal, interest rates were low and fueled robust borrowing. Inflation was low, and the stock market rose sharply.
The trends fueling 2003 growth, which appear likely to continue into 2004, include firm oil prices and high Saudi oil production, resulting in higher than budgeted oil revenues and good government fiscal performance. The depreciation of the dollar — and thus riyal — raises the costs of non-dollar imports into the Kingdom.
The trends include signs of Japanese recovery and strong growth in China along with the latter’s increasing importance to Saudi Arabia as a trade partner and oil consumer.
Low inflation in commodity prices should benefit Saudi oil related exports and low inflation in finished goods will stabilize import prices. The knock on effect is low Saudi inflation, borrowing costs and strong performance in the Saudi stock market.
With the exception of the depreciation of the dollar, the other major trends have been strongly positive for the economy, reflected in the figures for 2003 economic performance: Real GDP growth of 6.4 percent, a government budget surplus of SR45 billion ($12 billion), oil revenues up $20 billion over 2002, a current account surplus of SR102 billion ($27 billion), central bank foreign assets up by $14.9 billion to total $56.7 billion, inflation of 0.5 percent and a 76 percent rise in the stock market.
These strong conditions appear likely to continue into 2004. The key difference will be a likely overall decline in average oil production for the Kingdom, but the production cuts have been successfully aimed to keep prices firm, so the Kingdom will still enjoy a year of strong oil revenues in 2004.
Two OPEC oil production cuts in the second half of 2003, a production decline from average 2003 levels has already begun. The strength of the global recovery and strong demand growth, especially from manufacturing-intensive Asia where the Kingdom exports nearly half of its oil, should prevent cuts in 2004.
Oil prices ended the year at $30.71 (OPEC Basket), above the organization’s target price range of $22-$28 per barrel.
The bank forecasts a small decline in GDP growth for 2004, due entirely to oil production but not fully offset by higher government and private sector growth, 1.5 percent inflation, average oil prices for the year of $25 (average price for Saudi oil), a government budget roughly in balance or a current account surplus of SR28 billion ($7.5 billion).
Assuming imports for 2003 at roughly the same volumes as 2002, the depreciation would have cost the Kingdom SR10.49 billion ($2.8 billion) in added import costs for the year. Still the Kingdom was able to more than fully offset this cost with oil revenues that were much higher — an extra $20 billion — in 2003 than in 2002.
The report lists seven economic trends that shaped the economic landscape in the Kingdom in 2003 and may continue into 2004 — OPEC management oil prices, global economic recovery, China’s reshaping of the global oil market, commodity inflation, sharp depreciation of the dollar, global low interest rates and powerful Saudi Stock Market performance — up over 76 percent.
Conditions are right for OPEC to continue its successful price support strategy through 2004 — during which a sharp strengthening of the dollar or the riyal is not expected, says the report.
Several important developments related to economic reform took place in 2003, continuing a long-term gradual strategy of liberalizing the economy to stimulate private sector led growth and job creation. The Saudi Telecommunications Company completed its IPO in January. The government sold 20 percent of the company to the public making it the largest publicly traded company in the Kingdom.
In July, the Council of Ministers approved a new law to regular the insurance sector in the Kingdom allowing foreign investors in and creating a legal framework for the many local and foreign insurance companies currently operating in the Kingdom.
They also approved the new Capital Markets Law in the same month aimed at advancing development of the securities (stocks and bonds) markets in the Kingdom. The law is to take full effect in 2004 with the appointment of the board of the new Capital Markets Authority.
The Kingdom signed a gas exploration deal with a consortium including Shell (40 percent), Total (30 percent) and Aramco (30 percent), marking the first entry of foreign companies into gas exploration and production in the Kingdom.
Saudi has also entertained bidding by foreign firms for gas exploration elsewhere in the Kingdom.
All major sectors of the market showed strong gains in 2003. Money markets in the Kingdom had another year of ample money growth, available at low interest rates and in a low inflation environment.
The government reported at year-end that inflation for the year was 0.5 percent. Inflation had been zero or slightly negative for each of the previous six years. Inflation may rise to 1.5 percent in 2004, primarily from the impacts of more expensive imports due to the depreciation of the riyal. Overall, however, inflation is low in the Kingdom and is likely to remain so.