Saudi Arabia’s economic performance has been robust so far in 2013, despite the absence of a significant boost from the hydrocarbon sector, say a team of prominent economic researchers.

Government spending is one of the main growth drivers, underpinned by the need to deliver the necessary infrastructure for economic diversification.

The findings have been reported in Standard Chartered’s quarterly economic research titled: “Middle East and North Africa Focus - Adjusting to reality”.

Saudi Arabia’s loan-to-deposit ratio is very healthy. It fell to 80.5 percent in June from 82.3 percent in April, the report said.

Private-sector credit growth was 4.4 percent for the same period. Total bank deposits rose 2.3 percent in June.

As large-scale projects continue to materialize, public-private or private-only projects are the major credit drivers.

“We expect private-sector credit growth to reach 6.5 percent by end-2013,” said the report.

Diversification brings challenges as well as opportunities. The economists identify three key themes that they see as developing in the next 12 months:

(1) nationalyzing the workforce, which is in full swing; we assess some of the near-term challenges of the policy in a rapidly growing economy.

(2) Saudi Arabia’s housing market, which has strong potential, underpinned by a young and growing working population; we consider what has been achieved so far and what still needs to be done.

(3) Liquidity dynamics: Economists have analyzed credit growth in an economy underpinned by high levels of government spending.

The report said that employment challenge is a key long-term objective for Saudi policy makers. Employment is heavily skewed toward the public sector, which employs almost 90 percent of Saudi nationals.

Despite this, Saudi Arabia faces a significant unemployment challenge. Since 2011 the government has taken firm steps to localize the workforce, beginning with the Nitaqat scheme.

Since the beginning of this year the scheme has been supplemented by measures to cap the expatriate workforce.

In April, the government announced a three-month amnesty for illegal workers (estimated to be around 2 million) to rectify their residency status or risk fines or punishment.

Government figures show that close to 1.58 million workers have come forward, of which about 926,000 have renewed their work permits and another 300,000 have shifted their sponsorship. The data indicates that about 180,000 workers have left the country, according to the report.

The researchers said: “We estimate that 10 percent to 15 percent of the previously undocumented labor force will have left by the time the amnesty ends in November. Near-term, this increases the pressure on firms, especially in the construction sector. However, in the long run the benefit should be a better regulated and transparent labor force.

The report said Labour Minister Adel Fakeih was quoted in local newspapers saying that the government employment initiative has created 600,000 jobs for Saudi nationals. This shows that near-term the measures are succeeding in drawing Saudis into the workforce. In the long run, a key challenge will be providing the necessary skill set to enable Saudi nationals to be absorbed into the private sector.

Quota-based systems can produce results in the short term; however, they put pressure on the private sector to absorb higher-paid employees who do not have the skills for such jobs.

In the long run this is a disincentive, said the report.

Diversifying the economy to focus on productive sectors is vital, but this must be accompanied by measures to ensure that Saudi nationals have the necessary skills to take on these jobs.

Saudi Arabia’s housing needs are immense. The government has allocated almost $67 billion to the General Housing Authority to build 500,000 new housing units over the coming five years.

Market estimates indicate that about 2 million homes will be needed by 2020 to meet the expected population growth.

Housing construction projects have been slow to break ground, largely on the back of the government mortgage law which was only approved last year.

With the law in place, private-sector players in the market are likely to begin building and delivering the necessary housing stock, estimated to be around 200,000 units annually.

A pick-up in inflation is a direct consequence of the housing shortage. In July rent- and housing-related components of inflation edged up by 4.2 percent.

Real estate consultant Jones Lang LaSalle estimates that rents for apartments and villas rose by 6 percent and 8 percent, respectively, in Q1-2013.

Meanwhile, construction costs have spiralled and prices of building materials have surged by 20 percent over the same period, on a combination of shortages and high demand in the Saudi housing market.