RIYADH, 13 December 2004 — The key events of last week were Saudi Arabia related. First, the government released its 2005 budget estimates and 2004 economic performance update.

Second, OPEC decided to cut overproduction by 1 million bpd next year.

Third, the Saudi stock market continued its correction amid falling oil prices. Two items stand out in the government’s budget statement.

First, as a reflection of the booming oil markets and continued economic reforms boosting business confidence, the Saudi private sector recorded the highest growth rate (5.7 percent in real terms) in the last two decades (since 1984).

Second, the government also recorded the second highest budget surplus ever of SR98 billion (in 1980 the budget surplus was the highest ever at SR112 billion). Other highlights of this year’s performance include:

• GDP growth of 16.9 percent in current and 5.3 percent in constant prices (which was remarkably close to our recently released forecast of 5.2 percent).

• The oil sector recorded a growth of 28.2 percent while the private sector grew at 6.7 percent both in current prices.

• Sectoral growth included, industry: 6.4 percent, construction: 7.5 percent, electricity, gas and water: 4.5 percent, transport and communication: 7.8 percent, and wholesale, retail, restaurants and hotels: 4.9 percent.

• The cost of living index rose by only 0.2 percent, while the non-oil GDP deflator (a broader measure of inflation) rose 1 percent.

• The current account is estimated to record a surplus of SR193 billion compared to SR105 billion in 2003.

• Non-oil exports grew 23.8 percent to total SR51 billion (or 11.3 percent of total exports).

• Broad money supply (M3) grew 9.6 percent in the first ten months of 2004 (vs. 4.2 percent in 2003, same period), bank deposits grew 10.1 percent, bank claim on private and public sectors increased 26.3 percent and capital and reserves rose 12.9 percent during the same period.

The budget surplus of SR98 billion is lower than what most analysts had predicted (Our forecast:SR155 billion, Samba: SR112 billion, NCB: SR124 billion). The government’s budget statement says that SR52 billion has been allocated for development projects and to increase capital for the Real Estate Development Fund and the Saudi Credit Bank, but does not indicate if this amount was included in 2004 budget expenditure (If added to the surplus of SR98b., it comes to SR150 billion, very close to Riyad Bank estimate). Also, the government’s revenue (and nominal GDP growth) estimates are lower than Riyad Bank’s estimates.

The government presented a balanced budget for 2005 fiscal year with revenues and expenditures each equaling SR280 billion. The government estimated this year’s expenditure to total SR295 billion (vs. original budget of SR230 billion) and revenues to total SR393 billion (vs. SR200 billion budgeted). Highlights of the 2005 budget include (2004 budget allocations are in parentheses):

• New projects:SR75.5 billion (SR41.6 billion)

• Education and manpower development: SR70.1 billion (SR63.7 billion)

• Health and social affairs:SR27.1 billion (SR24.3 billion)

• Transportation and telecommunication:SR8.9 billion (SR7.3 billion)

• Water, agriculture and infrastructure:SR19.2 billion (SR15.1 billion)

• Municipal affairs:SR10.7 billion (SR8.6 billion)

• Credit extended by specialized credit institutions:SR10 billion (SR10.6 billion)

• SR46 billion of the surplus will go into debt reduction, from SR660 billion in 2003 to an estimated SR614 billion.

(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)