JEDDAH: The global financial crisis, the ensuing recession and the collapse of oil prices have significant implications for Saudi Arabia. But because of the economic reforms and investment boom of the last few years, Saudi Arabia is well-positioned to weather the extreme economic and financial conditions. Moreover, the Riyadh-based Jadwa Investment said in its monthly bulletin for December that the underlying economic fundamentals remain strong. Nevertheless, Jadwa said the Kingdom’s economy was heading for a slowdown. The economy is forecast to contract by SR325 billion next year. “We have revised our economic growth forecast for 2008 down to 5.7 percent and slashed our 2009 forecast to 1.5 percent. Real GDP growth next year will be the lowest since 2002 and in nominal terms the economy will shrink by 17.4 percent, the first annual decline since 2001,” Brad Bourland, chief economist at Jadwa, said.
The slowdown next year will be most noticeable in the oil sector. Average output is expected to be 7.1 percent lower in 2009 than in 2008 as a result of OPEC (the Organization of Petroleum Exporting Countries) production cuts. Saudi production peaked at 9.7 million barrels per day in July and has since been brought down and is expected to average 9.2 million barrels per day this year. With one more production cut expected to be announced this year and a further one in 2009, Saudi Arabia’s oil production will average 8.4 million barrels per day next year, the report said.
Lower oil export revenues will cause a large fall in the Kingdom’s current account surplus. Lower oil prices and production and an increase in domestic consumption will cause oil export revenues to fall to SR645 billion ($172 billion) next year. This is down by 41 percent from the 2008 figure, but still double the level in 2003.
Sharply lower prices of petrochemicals, metals and plastics are expected to cause the value of non-oil exports to decline for the first time in a decade in 2009. Although import prices have also fallen, continuing project implementation by the government and those in the private sector not constrained by financing will result in another year of double digit import growth. As a result, the trade surplus is expected to narrow to SR337.5 billion ($90 billion) in 2009 from SR843.75 billion ($225 billion) this year.
The current account surplus will plunge to 8.4 percent of GDP in 2009 from 32.6 percent this year, the Jadwa report said.
Non-oil sectors have been the main driver of economic growth in recent years as they have benefited from economic reform and an investment boom. But Jadwa said the outlook for all non-oil sectors had deteriorated owing to reduced consumer confidence resulting from the plunging oil prices and stock market. While there was little discernable impact on the economy from the 2006 stock market crash, this happened at a time when oil prices were rising. With the private sector experiencing wealth destruction and public sector revenues falling, the impact on confidence is likely to be more pronounced this time around.
The outlook has worsened most for those sectors exposed to the global economy or reliant on acquiring new financing, particularly manufacturing, which tends to be export-oriented. In contrast, domestically focused sectors such as retail and telecoms will be less affected. “We expect telecoms to be the fastest growing sector next year as the new fixed line providers begin operation and the full impact of the third mobile provider is felt,” Bourland said.
The impact of the adverse conditions will extend well beyond next year. It takes years to plan and fully implement many projects. To date, work has only started on only around one-quarter of the $600 billion of announced projects. The bulk of projects that are already under way will be completed, as it is not easy or cost effective to stop a complex project part way through, though some are likely to be scaled down, Jadwa said in its report.
Bourland said “Although the outlook for economic growth for the next few years has worsened, the non-oil private sector should grow at around 6 percent over the years to 2010, slightly quicker than the average for the three years to 2007 and well above the average of just 2.6 percent for the whole of the 1990s. This is because many projects under way will come on stream and the ongoing domestic economic liberalization and easing of business regulations will continue to yield benefits.”
With oil revenues accounting for around 85 percent of total revenues, the fall in prices and lower production will have significant implications for the government budget. The government is expected to continue to increase spending in 2009 even though this is likely to result in a small budget deficit. As oil revenues are expected to be about 40 percent lower in 2009 than this year, this will not compel the government to cut back spending, as oil revenues have been far in excess of what the government has spent. Over the first nine months of this year the government has spent only around 60 percent of the oil revenue it has earned. The Kingdom will increase spending by 10 percent next year, the report said.
Saudi Arabia’s inflation had surged over 10 percent this year compared to an average over the decade ending in 2006 of just 0.1 percent. “The collapse in commodity prices and a sharp appreciation of the riyal mean that inflation is likely to fall back fairly rapidly over the coming 12 months. The dampening of inflation is the main positive effect of the crisis on Saudi Arabia,” Bourland said.