JEDDAH, 2 April 2007 — Saudi Arabia’s economy shows signs of vitality this year as the nonoil private sector continues to grow at a more robust pace than the oil sector — a promising path to economic diversification. According to a Riyad Bank’s first quarter 2007 Saudi Economic Review report, the Kingdom’s GDP grew 12.8 percent in current prices in 2006, down from 23.7 percent growth in 2005.

The drop in nominal growth is attributed to two factors in the Saudi oil sector. First, Saudi oil production dropped to 9.12 million barrels per day in 2006 compared to 9.5 million bpd in 2005. Secondly, oil prices rose by 21 percent compared to 39 percent in 2005. The nonoil private sector grew 6.3 percent in 2006 compared to 6.6 percent in 2005, while the oil sector grew at a much slower pace of 17 percent in 2006 compared to 43 percent in 2005.

The report said, in real terms, the Kingdom’s GDP grew at more modest 4.2 percent in 2006 compared to 6.6 percent in 2005 and 5.3 percent in 2004. According to the report, oil prices were forecast to fall by $3 per barrel and Kingdom’s oil production also to fall from 9.12 million bpd in 2006 to 8.44 million bpd this year.

However, on these assumptions, the Kingdom’s GDP growth to show a slight decline of 1.1 percent in nominal terms, but to grow 4.3 percent in real terms this year. The nonoil private sector growth will drop slightly in 2007 to 6 percent in real terms and 8 percent in nominal terms.

The Riyad bank report said Kingdom’s spending was budgeted to increase 19.6 percent to $89 billion, compared to $75 billion in 2005. However, actual spending, which is generally higher than the budget in most years, turned out to be $104 billion in 2006. Riyad Bank’s forecast for this year is $116 billion, up around 11.5 percent from the previous year.

On the revenue side, the government has targeted a 2.6 percent increase in 2007 budget revenue to $107 billion compared to $175 billion in 2006. According to the bank, the actual revenue outturn to be $157 billion in 2007, thus giving a surplus of $41 billion compared to $71 billion in 2006. The report said liquidity continues to set new records. However, bank credit shows signs of cooling, primarily because of recent Saudi Arabian Monetary Agency (SAMA)-mandated guidelines related to personal loans and margin loans.

Broad money supply (M3), reached a record SR661 billion in December 2006, compared to SR551 billion a year ago, an increase of 19.3 percent.

As a percent of 2005 GDP, it stood at 55 percent, still significantly lower than in advanced economies such as the US (83 percent), Euro Zone (90 percent) and Japan (140 percent).

On the lending side, growth has certainly decreased from the numbers of earlier years. Total bank credit stands at an all-time high of SR497 billion, which is 84 percent of total banking sector deposits as of December 2006. In December 2005, the ratio was 92 percent.

Bank lending to the private sector reached a record SR452 billion in December 2006, thus growing 10.3 percent over the preceding 12 months.

Since April 2006, after the Saudi stock market debacle, bank lending to the private sector has been declining, dropping from 42 percent annualized growth to the latest 12.8 percent rate.

After crossing the 20,000 mark in February 2006, the Tadawul All-Share Index (TASI) went into a dive and yet to recover its losses.

The good thing, however, is that the “irrational exuberance” of the stock market of the past three years is over, investors’ expectations have returned to the ground level, and the role of the stock market in an otherwise remarkably strong economy has been, quite appropriately, reduced.

The underlying Saudi economy in 2006 showed one of the best performances ever, and, there is little reason to expect this growth to diminish this year.

The report also said Kingdom is embarking on a large number of new mega-projects.

The four major economic cities in Rabigh, Hail, Madinah and Jizan, herald a new era of regional development. According to the Saudi Arabian General Investment Authority (SAGIA), the four cities are expected to attract investments worth more than $80 billion and create more than a million jobs within the next 10 to 20 years.

The Riyad Bank report said the Kingdom’s largest-ever budget, with expenditures projected at SR380 billion and revenues at SR400 billion, will reduce government debt to SR366 billion (28 percent of GDP) by the end of 2006 compared to 40 percent in 2005 and spend SR140 billion on new projects.