JEDDAH, 6 May 2008 — The rising oil prices expected to have a positive impact on the Saudi economy. The current account surplus may touch an all-time high this year and economic growth and the budget surplus will also be exceptionally strong.
The Riyadh-based Jadwa Investment said in its monthly report yesterday that the lower oil prices in 2009 and 2010 mean that some of the headline numbers will not look as good, but the underlying picture will remain very healthy and in real terms economic growth will be stronger.
Oil export revenue is expected to reach SR975 billion ($260 billion) in 2008. This compares with an average of just SR161.25 billion ($43 billion) per year throughout the 1990s and is equivalent to around SR2.62 billion ($700 million) per day. Non-oil export growth may slow modestly in response to lower global petrochemical prices. Nonetheless, total exports are now projected at SR1.09 trillion ($290 billion), compared with just SR146.25 billion ($39 billion) in 1998.
The Jadwa report said higher global food prices meant that the food import bill for January of this year was 44 percent higher than that for one year earlier. Prices of many foodstuffs have subsequently moved even higher. In total, imports are likely to grow by 30 percent this year. However, this will be outweighed by the jump in oil revenues and the current account surplus will reach an all-time high of $127 billion in 2008.
The current account surplus will be reflected in a further jump in foreign assets. The holdings of foreign assets of Saudi Arabian Monetary Agency (SAMA) have climbed by over $10 billion per month in each of the six months to February. According to Jadwa, total foreign assets are expected to exceed $475 billion at the end of this year, up from just $73 billion at end-2002.
Higher oil revenues will also increase the budget surplus and are expected to reach SR260 billion ($69 billion) in 2008, the second largest ever.
Soaring oil prices and worsening inflation are putting pressure on the government to increase spending. Saudi Arabia’s inflation rate increased to a 27-year peak of 9.6 percent in March as against 8.7 percent in the previous month and just 3.1 percent in June of last year.
The Council of Ministers recently adopted short- and long-term measures to control increasing prices and inflation. In addition to a package of measures to alleviate the impact of inflation, including a public sector pay rise, announced in January, the government said at the end of March that it would finance a cut in the tariffs that importers pay on 180 foodstuffs, building materials and other consumer goods.
The Jadwa report said by adding to money supply growth and tightening various supply bottlenecks within the economy, higher government spending will feed into inflation, which is continuing to rise at an alarming pace.
Brad Bourland, chief economist at Jadwa Investment, said “We do not think that inflation will have too much of a negative impact on economic performance as it is the dynamism within the non-oil sector that is responsible for much of the run-up in prices. Our forecast for real GDP growth remains unchanged at 5.5 percent owing to strong growth in the manufacturing, construction, transport and communications sectors.”
He added that “higher oil revenues will allow greater government spending but the effects of this will be offset by the delays in many new projects and the impact of inflation on consumer spending.”
In nominal terms, Saudi Arabia’s GDP is likely to grow by 22.1 percent this year, the second fastest rate since 1990. At $457 billion, the Saudi economy will be three times larger than it was in 1998.
The report said expected fall in oil prices for 2009 will make economic performance look weaker compared with this year. In nominal terms the economy may not grow at all, while the current account and budget surpluses could shrink to five- and six-year lows, respectively.
“In real terms economic performance will improve owing to large new petrochemical facilities coming on-stream, a near doubling of cement capacity, higher oil production and the scaling up of work on various mega projects around the Kingdom,” Bourland said.