Saudi Arabia's formidable mineral resources will form the platform for a period of strong economic growth in 2012-16. According to Samba Financial Group report released yesterday, real GDP growth to average 5 percent in 2012-16, with the rate of real nonoil growth averaging 5 percent. Inflationary pressures should remain manageable, with a good deal of domestic demand neutralized through the import channel. Rents will remain a source of price pressure, but efforts to expand the housing stock should help to soften this as we move through the next five years, and inflation should stabilize at around 5.5 percent per annum.
The report said government spending will remain the engine of economic growth. Overall hydrocarbon earnings are expected to stabilize at around $285 billion. Add in nonoil revenues and total government revenue is expected to hold at around $300 billion a year during 2012-16.
With very little debt to service or pay down the main call on government revenue is wages and salaries, which tends to absorb 25-40 percent.
The public sector is still the "employer of first resort" for most Saudis. Thus the strong population growth rate and a brisk rate of inflation (5 percent plus) means that spending on wages and salaries will likely increase by around 6.5 percent a year during the forecast period.
Spending on supplies and services should increase at a similar rate, while subsidy spending-which encompasses domestic fuels and certain foodstuffs-will grow at a brisk pace given the rate of domestic consumption of gasoline, etc. Spending on unemployment benefit is also likely to show some strength in the first part of the forecast period as more people register for the first time. Overall current spending is therefore likely to grow at an annual average rate of around 3.5 percent.
Despite increasing recurrent spending demands there remains room to sustain large capital spending while still keeping the fiscal accounts in surplus through 2016.
The government's capital spending will form the basis of opportunities for private business. These in turn will be guided by the country's Ninth Development Plan (NDP), which is worth $385 billion (some 67 percent higher than the previous plan) and runs from 2010-14. The NDP, which is prepared by the Ministry of Economy and Planning (MEP), is a general framework for capital spending, and actual capital spending (in terms of the amounts and direction) may well differ from the plan as circumstances change.
The MEP has traditionally played a low key role in economic policy and development, but following the appointment of the former SAMA governor, Muhammad Al-Jasser, as minister in December 2011, it is expected to take a more vigorous and proactive approach.
The biggest single spending allocation is to education ("human resources"). This fits with the demographic challenge outlined and is aimed at all levels of education, with the overall goal of making school leavers and graduates more likely to secure jobs in the private sector, although it is notable that its share of spending between the two plans declined. Health is another major area of spending. Its share of spending was increased in recognition of the Kingdom's pressing health issues, stemming largely from population growth and the increasing prevalence of "lifestyle" diseases, the Samba report said.
Economic resources, which are dominated by utilities, see their allocations more than doubled and their share of spending rise sharply. This reflects the pressing need to provide enough power and water for a country where demand is increasing by around 8-10 percent a year. Saudi Electricity Co. (SEC) says it is committed to spending $60 billion over the next ten years.
Transport also sees a near doubling of its allocation. Road building continues apace, and will remain a cornerstone of transport policy in the Kingdom, however, rail and ports are also moving up the agenda.
Municipal and Housing services has often been overlooked, but this is likely to become more important over the next five years. First, urbanization is putting significant pressure on municipal services. Second, as noted above, housing has taken on much greater importance recently. As such, more than the $26.8 billion committed will likely be allocated as the government bids to expand affordable housing. Both housing and municipal services offer good scope for private participation.
Comparing the Eighth and Ninth plans provides some shifts of emphasis. It appears that certain regions of the country have lagged the overall development progress witnessed in the traditional commercial heartlands of Riyadh, Jeddah and the Eastern Province. Jazan Economic City and Prince Abdul-Aziz Bin Mousaed Economic City in Hail represent attempts to steer more investment to underdeveloped areas of the country.
A further broad priority is the effort to diversify the economy. This has been a maxim of all five-year plans, but in the preamble to the NDP it is put firmly in the context of "maximizing the return on competitive advantages". Saudi Arabia's comparative advantage lies in hydrocarbons (it has at least 90 years' worth of oil reserves) and it makes sense to exploit this by creating greater value-added. Oil refining generates value-added in its own right and also opens the door to a variety of industrial products-and jobs-through the petrochemicals product chain, the Samba report said.
The key to this is the use of naphtha, from which can be derived a much larger variety of "building blocks" than ethane, which has been the feedstock of choice for the Kingdom's producers, but which is in short supply.
A vertically integrated approach is also being adopted in the aluminum sector, where there are plans to harness the country's bauxite reserves by constructing what will become the world's largest aluminum complex at Ras Al-Khair. The $10.8 billion project, which is a joint venture between Maaden and Alcoa, is designed to attract a large number of conversion industries to cluster around the site.
The report said authorities are also looking to boost the nonoil export sector more broadly in a bid to enhance diversity, reduce vulnerability to external shocks and create a platform for more sustainable and predicable growth. Evidence suggests that economies based on a single commodity will become effectively diversified only when they successfully create a robust quantity and variety of exports and worldwide purchasers for them.
The Saudi authorities have identified a group of second-tier nonoil exports that have shown growth rates of between 8 percent and 25 percent during 2004-07. The government believes that these industries are ripe for additional help in terms of offering information on demand in export markets, organizing export promotions, providing competitor information, technical specifications and packaging requirements of key markets. Taking appropriate measures against import "dumping" is also mentioned again.
Fostering a "knowledge based economy" is given greater prominence in the NDP than in the eighth development plan. This is an important element of hydrocarbons-based economies that have successfully diversified again. Specifically, the government wants to promote "strategic alliances between private national companies and technically advanced international companies" in order to foster technology transfer. In addition, the authorities are prepared to use "soft loans" to encourage the use of modern technologies, especially in the export sector, while simultaneously discouraging the use of unskilled foreign labor. The authorities are especially keen to make a stronger link between education and business by establishing research and development centers that can serve the needs of business. The NDP provides grants for strategic research centers to the tune of $240 million a year, and also speaks of providing an annual $80 million to government agencies and $53 million to private sector firms.
ICT is an important adjunct of the effort to deepen and widen the knowledge-based economy, and has strong potential growth prospects. The Ministry of Economy expects demand for fixed line services to increase by 4.4 percent a year, while demand for mobile services is expected to climb by 5.6 percent a year, with the penetration rate reaching about 194 percent by 2014. Broadband demand is forecast to grow even more briskly, by about 10 percent, with the number of subscribers climbing from 2 million to 3.25 million by 2014 (total penetration will reach 11.4 percent, while residential coverage will reach 47.4 percent).
The government wants to narrow the "digital divide" between the regions. To do this, it has established the Universal Service Fund, which aims to provide full coverage in areas where the market does not provide ICT services. The government also plans to extend broadband networks to all schools, universities, hospitals, government agencies and civil society institutions. Beyond this, it wants to expand "e-government" services and envisages a "shared role" for the private sector in this.
Despite the prominence given to ICT and the knowledge economy more generally, financial allocations to ICT under the 9th Plan amount to a comparatively meager $239 million, with a far larger amount of $2.3 billion given over to developing the Saudi postal service. This presumably reflects the advanced liberalization of the ICT sector and the large role envisaged for the private sector, both domestic and foreign, the Samba report said.
