JEDDAH, 12 September 2004 — The economic outlook for Saudi Arabia has changed substantially in the past few months following much stronger oil prices than initially expected early in the year. Crude oil prices have risen sharply during the last eight months with Brent crude prices averaging $35.4 a barrel.
Moreover, the outlook for Brent price average in whole of 2004 is expected to be around $35 a barrel, which translates to an average Saudi export price of $33 a barrel, up 22.2 percent from the price registered in 2003, and approximately $14 higher than the original 2004’s budget assumption. It is estimated that for every dollar above the budget’s level, Saudi Arabia gains around $2.5 billion.
Moreover, oil revenues will also be rising due to the production increase by nearly one million barrels per day above the quota designated for Saudi Arabia. Oil revenues, which are the source of nearly three-quarters of the government’s income, will remain very high throughout the year with very little sign that prices may fall in the fourth quarter, especially against continued disruption of oil supplies in Iraq, global economic recovery and rising demand from US and China.
The performance of Saudi’s fiscal account is closely correlated to the prices of oil. The original target for the 2004’s government budget assumed a deficit of SR30 billion. If government expenditures were to remain the same at SR230 billion, then with the higher oil prices as projected above, the deficit will reverse into a significant surplus of SR165 billion. However, brought up by government security spending, including current and counter-terrorism equipment and telecommunications, total expenditures are expected to rise above the budget to SR265 billion.
In turn, projected surplus of the year will come to around SR130 billion. Anticipating a huge surplus, the government has announced its intention to set aside SR41.0 billon or nearly 32 percent of this year’s surplus for investment in development projects, on a five-year interval, including roads, water and swage, health, education and housing, with the aim to have a direct and considerable impact on the welfare of Saudi citizens. Meanwhile, the remaining SR89 billion is expected to be used in retiring public debt, which amounted to SR660 billon by end of 2003. Higher oil prices are bound to positively impact the overall economic activities in the Kingdom this year. Building on the momentum of high oil prices over the last three years, the Saudi economy is in a much firmer position now than the last few years. Going into 2004, the economy witnessed two consecutive strong growth years with a much able private sector and well capitalized banking system.
Moreover, the sharp rise in oil prices seen so far this year and subsequent linkages to the private sector will translate into very substantial economic growth in the current year. It is expected that nominal GDP will rise by 9.3 percent this year compared to a growth rate of 12.1 percent in 2003 and 2.9 percent in 2002.
However, accounting for the new additional expenditures from this year surplus in a 5-year interval, it is expected to increase the government’s capital expenditures by around SR8 billion annually. With an average expenditure multiplier of 3.1, this is projected to generate an added value of around SR24 billion to the Kingdom’s GDP per annum.
Apparently, petroleum sector has been the real underpinning of this growth, typically contributing around 40 percent of GDP, but is likely to rise to 43 percent of GDP this year, as the oil sector is expected to record a staggering 16.0 percent increase in 2004. This continued dependence has been entrenched by failure on the part of successive development plans to diversify the Saudi economy.
With the expansion of government current and capital expenditures taking place this year, growth in the non-oil sector is projected at 4.7 percent compared to a growth rate of 1.9 percent in 2003. While government sector is estimated to grow by 3.0 percent, the private sector is projected to rise in nominal terms by 6.1 percent in 2004 following a 3.4 percent increase in 2003, yet its contribution to GDP is expected to fall from 40 percent to 36.3 percent in the current year.
On the production side, demonstrated by manufacturers’ borrowing appetite that grew by 13 percent in the first half of the year and boosted largely by buoyancy of consumption demand, the manufacturing sector is expected to grow by 7.0 percent in 2004. Although bank’s credit to the commerce sector rose only modestly by 1 percent in the first half of year, accounting for seasonality, it expanded by 17 percent over the same period a year ago. Accordingly, the wholesale and retail trade sector is expected to sustain its strong performance, growing by 5.6 percent in 2004 following an estimated growth of 4.6 percent last year. With bank’s lending to construction activities reaching SR23.1 billion in the first half of this year, or 8.5 percent over the same period the year before, while large number of infrastructure and industrial projects are publicly awarded, the construction sector is expected to grow by 5.0 percent in 2004 after rising by 2.8 percent in 2003.
Meanwhile, the transportation and communication sector is poised for a strong growth of around 5.0 percent, following last year rise of 4.7 percent. Agriculture sector, which has expanded its bank’s credit by 31 percent in the first six months of the year, is likely to grow by around 1.8 percent in 2004.
Total banks’ lending to the private sector rose by 16.8 percent in the first half of current year, bringing the annual expansion by 27.5 percent in the 12-month to June of 2004. On the other hand, claims on the public sector rose marginally by around 1.5 percent in the first six months of the year. Generally, money growth changes can affect interest rates and expenditure levels for plant and equipment, consumer durables and housing. A higher growth rate of money (M3) at 7.3 percent in the first half of the year will increase expenditure demand. This, however, reflected in the rise of private import financing by 13.1 percent in the first half of the year compared to the same period a year ago.
Moreover, anticipating higher demand in the second half of the year, new letters of credit rose sharply by 31.6 percent in the first six month of 2004 over the first half of 2003.
(Dr. Said A. Al-Shaikh is Chief Economist at The National Commercial Bank, Jeddah.)