JEDDAH, 19 July 2005 — The Saudi economy is booming and heading for the best year in the Kingdom’s economic history.
According to Samba Financial Group forecast real GDP is likely to grow by 6.5 percent, reflecting over 7 percent output expansion in both the oil and private sectors, and more modest growth of under 4 percent in government. The report also sees growth in GDP of 26 percent in nominal terms with insignificant domestic inflation.
The Samba report titled, “The Saudi Economy at Mid-Year 2005”, said; “Oil revenues, the government budget surplus, and the current account surplus will all register all-time highs because of exceptional oil prices and high oil production levels so this upswing is just beginning and will be sustainable for many years.”
The report added that the combination of strong consumer spending, strong business investment, likely sustained high oil prices, growing Saudi oil production, improved government finances, and likely substantial fiscal stimulus in 2006 and beyond, all combined to lay the groundwork for sustained economic growth for several years.
Saudi Arabia will earn $157 billion in oil export revenues, a 48 percent increase over the $106 billion earned in 2004, which was itself a strong year, the report said, adding a current account surplus to reach $96 billion, or 30 percent of GDP. “This marks the seventh year in a row of surpluses,” the report said.
Samba expects budget surplus of SR191 billion after a 20 percent increase in spending over the budget.
The high oil price is not crisis-driven, but driven by strong underlying demand growth and tight supply in the global oil market. These conditions are likely to continue for years and to be of specific benefit to Saudi Arabia.
According to Samba oil prices will average $45 per barrel for the year as an average price for Saudi oil, which would equate to about $51 per barrel for West Texas Intermediate (WTI) and Saudi crude oil production to average 9.6 million barrels per day (bpd).
So far, however, oil revenues have not been the source of growth in domestic liquidity through 2004 and thus far in 2005. The domestic banks’ expansion of lending to both consumers and businesses has been responsible for about 75 percent of the money growth in Saudi Arabia, while the excess oil revenues are accumulating as foreign assets in the central bank.
It said growth in the central bank’s foreign assets of $47 billion to total $135 billion at the end of 2005. This strength in the foreign asset position of the central bank means there will be no pressure on the pegged exchange rate for the foreseeable future.
Government debt will stand at 51 percent of GDP, down from a peak of 119 percent six years ago. All of the debt is domestic, riyal-denominated, and about 75 percent held by government institutions.
Business investment is now growing strongly, after remaining flat for several years, which created pent up demand.
Much of this is mega-project in size and scope, with timelines that extend to 2010 and beyond.
Wealth creation, through the stock market, real estate market, corporate profitability, and consumers’ new access to borrowing, is fueling increased levels of consumer spending. Illustrative of the wealth creation, growth in the market capitalization of the Saudi stock market over the past three years has been SR1.63 trillion ($435 billion) almost double total oil export revenues of $234 billion during the same period.
The Samba report said it is clear that abundant liquidity is a key driver of current growth. In 2004, money supply (M3) grew by 17.2 percent, the highest level of growth since the first oil boom a quarter century ago.
The growth in money has been predominantly due to expansion of bank lending. The SR 71 billion growth in M3 in 2004, about 75 percent of was due to banks expanding lending. The remaining liquidity growth was due to new sources of money, such as injection of oil revenues into the domestic economy, repatriation of wealth, and monetizing stock market capital gains.
The Saudi population at the time of the census taken in September 2004 stood at 22.6 million residents, of which 16.4 million were Saudis, and 6.1 million were non-Saudis, mainly foreign workers and their families. Based on the new population data, Samba said, per capita GDP at year-end 2005 to stand at $13,603.
One clear feature of the Saudi economy in 2005 is that levels of investment in fixed assets, such as buildings, machinery, and vehicles, have picked up noticeably. As a percent of GDP, such investment stayed relatively constant from 1990 to 2004 at about 18 percent of GDP, and GDP growth averaged just 1 percent during the 1990s. The low growth of the 1990s was associated with low levels of such investment, or what is commonly called “fixed capital formation.”
The Samba report said “Saudi Arabia should strive to achieve investment at about 25 percent of GDP. Such investment lays the groundwork for future growth.”