JEDDAH, 4 April 2007 — Saudi Arabia’s economy is set to grow at a robust pace despite the deceleration it will witness this year. According to a SABB’s latest report about Saudi Arabia prepared by SABB Chief Economist Dr. John Sfakianakis, the Kingdom’s nominal GDP is expected to decline by 2.2 percent from SR1,304.6 billion ($347 billion) in 2006 to SR1,275 billion ($340 billion) this year. Real GDP will reach 3.7 percent on the back of anticipated minimal oil output increases in 2007.
The SABB report said if Saudi Arabia increases its oil output, real GDP will also rise. An increase in the Kingdom’s oil production of 5 percent will see an increase of some 1.8 percent in real GDP.
The Kingdom’s non-oil private sector growth was 6.3 percent in 2006, down from 6.5 percent in 2005, effectively a drop of 3.2 percent. A substantial 19.2 percent fall in wholesale, retail, restaurants and hotels in 2006 was witnessed as was 33.3 percent fall in activity in the insurance, real estate, business service and finance sectors. These declines illustrate reduced consumer spending associated with the stock market collapse.
“The worst the economy has witnessed in terms of macro-economic aftershocks are abating but it is of vital importance to recognize the effects of the stock market decline on the consumer in areas such as household indebtedness and spending patterns. Consumer optimism is slowly rising but it hinges on the performance of the stock market. Despite the overall situation arising from the fall in the stock market we remain very optimistic about the growth prospects for the Kingdom’s economy over the next five to seven years. The main ingredients supporting strong growth in the Kingdom are high oil revenues, high domestic demand from government and private sector non-oil expansion,” Sfakianakis said.
He added “The severity of the stock market correction the country witnessed should have brought the economy to its knees but this did not happen. The economy has been experiencing high growth rates, tantamount to a boom, since 2003 and this cushioned the economy against a severe downside. In fact, all of the regional economies weathered their respective market downturns remarkably well. All currencies held their ground, banks were far from crisis point and, on the macro-economic level, all the regional economies look healthy.” The Kingdom’s economic growth this year will be derived from the non-oil private sector as well as government spending.
Net income was up by 19.1 percent in 2006, though down from the 40.1 percent seen in 2005. Leading this growth will be the construction sector, as fixed capital expenditure continues to grow and the government continues to build large infrastructure projects.
According to SABB estimates there are more than SR225 billion worth of construction projects under way in the Kingdom and that as construction demand continues to increase an obvious beneficiary will be the cement sector.
The eight listed cement companies in the Kingdom have been operating at over 100 percent capacity utilization rates for the last two years.
The near-doubling of capacity that should be coming on stream in stages by 2008 allied to the plants for which industrial licenses have been issued would raise production capacity to about 40 mtpy and involve investment of over SR18 billion.
The financial services sector also continued to grow and 49 investment banking licenses were granted as of January 2007.
At the end of 2005, 10 international banks were awarded full banking licenses by Saudi Arabian Monetary Agency (SAMA).
The report also said comparative with previous oil booms, Saudi Arabia is demonstrating impressive fiscal discipline. The Kingdom continues to build liquidity through external reserves such as that in December 2006 foreign assets had reached SR842 billion ($224.6 billion). SAMA’s total foreign assets will reach SR1,028 billion ($274 billion) by the end of 2007 which is 80.6 percent of GDP.
The SABB report said the government would continue to use part of its surplus to pay off domestic government debt. According to the Ministry of Finance, public debt was expected to drop from SR475 billion ($126.6 billion) in 2005 to SR366 billion ($97.6 billion) in 2006, accounting for 28 percent of GDP in the later year.
According to SABB estimate, the government domestic debt will reach 24 percent of GDP by the current year’s end, which is well below the 60 percent debt to GDP criterion set for Gulf Cooperation Council (GCC) economic convergence.
While the economy continues to expand, prices in Saudi Arabia are beginning to show signs of a significant short-term rise. Imported inflation could become a factor, as it did in past years, if the dollar weakens further and importers decide to pass the higher cost of imports on to the consumer. The SABB report puts inflation in Saudi Arabia at 3.5 percent by year’s end.
Sfakianakis said “Although we do not discount the role of imported inflation we are attributing the recent spike in prices in Saudi Arabia to domestic factors more so than currency volatility.”
He added “A rise in rents over the past year and half and supply bottlenecks associated with the regional boom are pushing up prices.”