JEDDAH: Despite Saudi Arabia’s subdued economic performance, public sector investment has been ramped up substantially over the past six months. The value of nonoil contracts awarded by the public sector exceeded SR225 billion ($60 billion) — equivalent to 18 percent of the forecast for total GDP (gross domestic product) this year.
The increase in investment has helped reassure investors that the government is committed to supporting nonoil growth in the short term and expanding and improving the Kingdom’s infrastructure over the medium term, the Riyadh-based Samba Financial Group said in its “Saudi Arabia: 2009 Mid-year Economic Review and Forecast” report released yesterday.
There is a sharp dichotomy developing between public and private economic performance. Public sector investment has been vigorous in both the oil and non-oil sectors; private investment, in contrast, remains weak, hemmed in by extremely tight credit conditions and poor export prospects. Private consumption has recently revived somewhat, though this appears to reflect gains in the stock market where the outlook is uncertain.
The surge in public sector spending can be comfortably financed by assets built up during the oil price boom. Public sector deposits with the domestic banking system are worth around SR980 billion ($260 billion), the Samba report said.
The private sector has been comforted by the government’s vigorous approach to spending, and other efforts to channel more resources to private projects through official institutions such as the Public Investment Fund.
Samba has raised spending forecast somewhat to reflect the surge in public sector investment witnessed in the first half of this year. “Much of this additional spending will probably not show up in the fiscal accounts since a good deal of it is being undertaken by state-owned firms rather than the central government; nevertheless, some will, and we have therefore raised our spending growth forecast to 24 percent, giving total spending of around SR632 billion ($169 billion). This points to a central government deficit of SR165 billion, or 13 percent of GDP this year,” Howard Handy, general manager & chief economist, at Samba said.
The current account is expected to move into a deficit equivalent to about 15 percent of GDP in 2009, narrowing to around 10 percent in 2010. The aggregate nominal value of these deficits is around SR338 billion ($90 billion) and could be comfortably accommodated by a drawdown in official net foreign assets, which are currently worth around SR1.5 trillion ($400 billion).
The Samba report said government’s robust response to the domestic slowdown can be comfortably accommodated by its financial resources: At the end of 2008 official net foreign assets were $440 billion (equivalent to 95 percent of GDP or 235 percent of imports of goods and services). The domestic counterpart to these assets meant that domestic debt on a net basis (i.e. gross debt less public sector deposits with the banking system) was hugely negative, at 47 percent of GDP. Since then, net foreign assets have been drawn down by around $40 billion, and public sector deposits with the banking system by around SR75 billion ($20 billion). However, net public sector debt is still firmly in negative territory, and is likely to remain there for the next two years at least.
Oil prices have rallied in recent months. “Prices are currently being influenced more by financial markets than fundamentals, and could well turn down in the months to come, but assuming production discipline is maintained, WTI should average $57 a barrel this year. We anticipate an average of around $65 a barrel in 2010,” Handy said.
“Looking at the Saudi economy as a whole, we expect a contraction in real GDP of just over 1 percent this year. Nonoil economic growth is expected to stay positive, with the impact of public spending helping to override weak private activity,” he added.
Inflationary pressures have continued to subside in the Kingdom. For much of 2008 inflation was a serious and pressing issue for Saudi Arabia. From an annual average of just 4 percent in 2007, the 12-month consumer price growth accelerated to a peak of 11.1 percent in July 2008. Since then, price growth has softened considerably. The fall in global food prices has had a positive impact, while the broad stabilization of the US dollar against other major currencies has also helped. These factors have helped to offset still-strong growth in rents (16 percent in the year to April 2009). Consequently, overall inflation is now running at just over 5 percent, the Samba report said.