NICOSIA, 11 January 2006 — With oil prices likely to remain at high levels, Saudi Arabia’s economy seems poised for yet another good year, while the expansionary budget for 2006 should help ensure growth stays strong, the Middle East Economic Survey reported Monday.
The Cyprus-based weekly quoted top economists at three of the Kingdom’s largest banks as saying that the world’s largest oil producer is set for yet another year of bumper revenues and a hefty budget surplus, given that the budget is based on a conservative price assumption of $30 a barrel.
Khan Zahid, chief economist at Riyad Bank, expects economic growth in 2006 to surpass 2004, Saudi Arabia’s second-best year, but suggests that it may not equal the record set in 2005. There will be some slowdown in the oil market and cooling off in local markets, so growth will be less steep, said Zahid, adding, however, that he estimates the budget surplus to be higher in 2006.
The Saudi government is forecasting a surplus of SR55 billion ($206 billion) this year but Riyad Bank is anticipating a rise in oil prices of 12-14 percent, with oil output at ten million barrels per day, giving a surplus of SR150 billion ($563 billion).
However, Zahid cautions that he would not be surprised if oil prices climbed by less than 12-14 percent, as markets cool off slightly. A big slide in the oil price is unlikely because, unlike previous oil booms in the 1970s and 1980s, this is a “demand shock” rather than a “supply shock”, said Said Al-Shaikh, chief economist at National Commercial Bank.
There is “an element of shortage” because of the downturn in production from Iraq, but the key issue is that demand continues to outstrip supply, Al-Shaikh said. “As a result, a sizeable surplus will be generated which will give the government comfort to pursue expenditure programs, especially on the capital side, plus sufficient money for further retiring of public debt, bringing it down to 25-30 percent of gross domestic product (GDP),” he said.
Debt stood at 42 percent of GDP in 2005 and 64 percent of GDP in 2004. Brad Bourland, chief economist at Samba Financial Group, is likewise predicting that the Saudi economy will remain robust. “Oil prices and revenues look positive and join strong trade and budget surpluses. The budget provides a good fiscal stimulus, with the increase in spending based on conservative price assumptions,” he said.
However, Bourland points out that the “broad challenge is to develop a dynamic non-oil sector so that if the oil price tumbles, the broader economy doe not follow it down.”
The Saudi government is already seeking new projects to diversify away from the oil sector and make the private sector the driver of economic growth. It recently launched the SR100 billion ($26.6 billion) King Abdullah Economic City to attract foreign investments in housing, petrochemicals and pharmaceuticals.
Despite it being cash-rich, the Kingdom is also seeking funds for projects worth more than SR2.34 trillion ($624 billion), in sectors such as petrochemicals, gas, railways, desalination and electricity, with the aim of attracting $1 trillion in foreign direct investments (FDI) over the next 20 years.