JEDDAH: Saudi Arabia’s real GDP (gross domestic product) growth is expected to fall by around 1 percent in 2009 as a contraction in the oil sector is projected to offset moderating growth in the non-oil sector. But real GDP growth is forecast to increase by 3 percent in 2010 based on a recovery in global demand conditions and a higher oil production level.
According to the Jeddah-based National Commercial Bank’s (NCB’s) Saudi Economic Perspectives, July 2009, Saudi Arabia’s economic performance has been exceptional in recent years. Between 2003 and 2007 real GDP growth averaged around 5 percent a year, the strongest growth in a decade, and up strongly from the 2.5 percent annual average growth during the 1990s. In 2008, real GDP growth is estimated to have reached 4.5 percent, largely driven by strong private and public investment expenditure on the back of record oil prices and abundant liquidity. However, the NCB report said the economic growth outlook for 2009 had deteriorated sharply because of the global financial crisis and economic recession.
Although Saudi Arabia has been less affected by the financial crisis, the indirect impact on the real economy will be significant. There are three main channels through which the global crisis is spreading to Saudi Arabia: (1) substantially lower oil prices are shrinking the main source of government revenue, (2) weaker global demand for oil has motivated drastic OPEC production cuts and (3) tighter credit and investor risk aversion in international markets have led to a shortage of foreign capital, a massive decline in local asset prices and lower investment.
Saudi Arabia is still dominated by the oil sector. In 2008, the oil sector accounted for about 32 percent of real GDP. Oil export revenues represented about 90 percent of total exports and government revenues. Oil also plays an important role in supporting other major industries, such as petrochemicals, steel, aluminum, power generation, water desalination and other energy-intensive industries.
Saudi Arabia is therefore vulnerable to the recent negative oil price shock, which brought down Arab light prices from a high of $142 a barrel in mid-2008 to an average of about $53 a barrel so far in 2009. “With substantially lower oil prices and reduced production level, oil revenues are expected to fall by over half in 2009. This will have adverse implications for the economy’s fiscal and external positions,” Said Al-Shaikh, chief economist at NCB, said.
Moreover, real oil GDP will contract by around 8 percent in 2009, and so the sector’s contribution to overall economic growth will be unarguably negative. In 2010, the contribution of the oil sector to economic growth should turn positive but will remain modest, as Saudi crude oil production is expected to increase by an average of only 400,000 barrels per day. Real non-oil GDP in 2008 grew by around 4.3 percent but is expected to moderate to 2.3 percent in 2009, reflecting spillovers from the global financial turmoil and economic slowdown.
The Saudi retail sector, growing at an annual average of around 5 percent in the last five years, is expected to slow down due to falling consumer confidence, the NCB report said. The construction sector, which has been growing rapidly in recent years, is also expected to slow down due to tight financing conditions. However, falling prices of building materials and infrastructure projects contracted by the government will continue to provide some support for construction activities in 2009. Transport and telecoms, the fastest growing sector in 2008 at around 12 percent, will likely decelerate due to slower growth in subscription, intensifying competition and a reduction in foreign operations this year. Aside from the effects of higher financing costs, activity in the manufacturing sector is expected to be less buoyant this year, given weak global demand prospects and excess production capacity. The financial sector, which grew by 3.5 percent in 2008, is also going to slow down, given the fall in bank lending activities and the massive decline in equities and other asset classes owing to the global financial crisis.
On the expenditure side, investment and private consumption were the main sources of growth in recent years. Investment, both private and public, increased from about 25 percent of GDP in 2007 to nearly 30 percent of GDP in 2008. However, the outlook for private investment and consumption, along with net exports as drivers of real GDP growth has weakened significantly this year. Private consumption will decline, as the fall in oil prices and weak labor market conditions erode income levels while the plunge in global and local equities triggers negative wealth effects.
Due to the difficult borrowing environment at home and abroad, projects are facing delays in the Kingdom. With the government playing a more extensive role in investment expenditure, focus will remain on strategic or vital infrastructure projects to meet consumer and industrial demand and sustain economic growth. Inflation pressures in Saudi Arabia, which were perceived as a major concern until the first half of 2008, have eased considerably with the onset of the global economic crisis. Recent data show that inflation in Saudi Arabia fell to 5.2 percent in June 2009, down from a peak of 11.1 percent in July last year. Despite heavy government spending, strong growth in oil revenues contributed to sizeable twin surpluses in recent years. In 2008, the fiscal and current account surpluses reached an astounding 35.2 percent and 28.6 percent of GDP, respectively.
The Saudi government remains committed to increasing spending and providing the much needed boost to domestic demand despite the projected decline in oil revenues. The government budgeted SR475 billion for total expenditure in 2009, out of which SR225 billion was allocated to capital expenditure. The budget prioritizes capital spending in key areas, such as education, healthcare and infrastructure, which is consistent with the government’s objectives to create job opportunities and support economic growth and development in the medium-term, the NCB report said.