JEDDAH, 8 December 2004 — Saudi Arabia’s gross domestic product (GDP) is set to grow 22 percent in nominal terms and 5.2 percent in real terms in 2004 — one of the highest numbers recorded in recent years, according to Riyad Bank’s third quarter Saudi Economic Review.
Saudi economy continues to bust all records. Liquidity, as measured by broad money supply (M3), is at an all-time high of SR452 billion (57 percent of last year’s estimated GDP). Total bank lending stands at a record high of SR301 billion, which is 76 percent of total banking sector deposits. Bank lending to the private sector (which includes consumers) has reached a record SR261 billion (87 percent of total lending). And the Saudi stock market made a new record with the Tadawul All Shares Index touching 6,594 points, a staggering 162 percent gain over its 2002 level, the report said.
“The year 2003 was shaping out to be one of the best in recent history for the Saudi Arabian economy and all indicators suggest that this year is going to be even better, in fact, one of the best ever in economic terms,” the Riyad Bank report added.
“Driven by record high oil revenues, the pickup in government projects and economic activity is evident all around,” Khan H. Zahid, chief economist and vice president at Riyad Bank, said.
On Sept. 3, 2004, Crown Prince Abdullah, acknowledging that the Kingdom is set to earn record oil revenues, announced that SR41 billion from the budget surplus would be set aside for development projects. Giving out some details, he said that SR30 billion out of that amount would be spent on social and economic projects in the next five years, with the following five sectors enjoying priority — water and sewage, roads and expressways, primary healthcare, school buildings and technical and vocational education. He also reiterated that the lion’s share of the budget surplus would be used to repay part of the government debt, which totaled SR660 billion in 2003.
Among other items, the crown prince also mentioned that SR9 billion will be allocated to the Real Estate Development Fund (REDF) to provide suitable housing for Saudis, and the capital of the Saudi Credit Bank will be increased from SR1 billion to SR3 billion to provide loans to Saudis with limited incomes and to Saudi youths who want to establish small businesses.
Many government ministries and agencies, the report said, are feverishly implementing new projects and contracts. In the first half of September, the government announced 54 new municipal contracts worth SR1.09 billion. The Jeddah Municipality has offered 19 new investment opportunities in various parts of the municipality to the private sector. Saudi Aramco concluded a deal for funding a $3.5 billion refinery expansion in China.
The Finance Ministry signed two contracts to provide loans for the construction of a private college in Riyadh and expansion of a private educational complex in Dammam. The Saline Water Conversion Corporation (SWCC) signed two contracts valued at SR35 million for the renovation of two desalination plants in Jeddah and Jubail. In addition, the SWCC also unveiled plans for four major water and electricity projects estimated to cost SR20.5 billion.
So far, in the first half of 2004, the government has awarded 1,415 contracts estimated to cost SR14.42 billion, for projects and operation and maintenance contracts, according to the Finance Ministry. The Royal Commission for Jubail and Yanbu recently earmarked SR10 billion for the establishment of a new industrial zone in Jubail. The new zone, named the Western Zone, will house 20 basic industries in an area covering 8000 hectares.
The Ministry of Municipal and Rural Affairs recently unveiled plans for a number of projects in Mina to cost around SR750 million. The Jeddah Islamic Port authorities have started feasibility studies to set up a commercial complex near the port to serve some 600 companies involved in shipping, customs, etc. The minerals sector has been a hotbed of activity. In its 2003 fiscal year annual report, the Ministry of Petroleum and Mineral Resources stated that it had issued 1,090 licenses involving cement ore, precious and industrial minerals and ores, metals and building materials.
The ministry received SR82 million in fees and charges from these licenses. Licensees mined 208 million tons of minerals in 2003, up 28 million tons from the year before. The private sector is also exhibiting much vigor and economic activity from the oil boom. The Saudi banking sector made record profits in the first half of this year. Net profits of the 10 commercial banks jumped 28 percent to SR8.1 billion in the first six months of 2004, compared to SR6.35 billion in the first half of 2003.
According to reports, thirty-five Saudi joint stock companies earned net profits of SR20 billion during the first half of 2004 thanks to the strong economic growth in the Kingdom.
The two heavyweights in the Saudi market, Saudi Telecom Company (STC) and SABIC together posted profits of SR10.4 billion during this period compared to SR7.3 billion the same period a year ago. Saudi Electricity Company posted SR56.7 million profit the first half of this year compared to a loss of SR334.9 million the same period last year. Saudi gold bullion sellers reported a 23 percent increase in sales in the second quarter of 2004.
Tourism sector is expected to grow 67 percent in 2004 as an increasing number of Saudis take trips at home instead of abroad. A Saudi firm has announced plans to set up a SR120 million resort in the tourist city of Abha. New factories are opening and existing ones expanding. For example, in the cement sector, 10 new factories have been granted licenses last year with a productive capacity of 16.5 million tons and investment of SR6.58 billion. The dual impact of significantly higher-than expected oil price and greater output has resulted in a dramatic upward revision in nominal GDP growth.
Riyad Bank also upped forecast of the non-oil private sector growth from 4.6 to 5.8 percent in nominal terms and said real GDP to grow 5.2 percent in 2004. It is up significantly from our previous forecast of 1.1 percent and the second best economic growth performance in the last decade. For the private sector, the bank revised upward real economic growth forecast of 4.8 percent in 2004 from 4.5 percent. For the oil sector, Riyad Bank forecast of growth in real economic activity has changed to positive (5.4 percent) from negative (-10 percent). Originally, it had forecast a drop in oil output.
The impact of the oil boom on the government budget is equally dramatic. The bank forecast government revenues to total SR427 billion compared to the previous forecast of SR272 billion (54 percent higher). It is 113 percent higher than the SR200 billion government budget announcement.
As the Saudi economy benefits from record high oil revenues and vigorous economic activity, a number of new challenges are developing for the Saudi banking system. Some of them will be temporary while others will be long-term and lead to significant changes in the financial sector.
The biggest long-term challenge that the banking sector will face is the development of the Saudi financial sector in response to two major structural developments: (1) The new Saudi capital market regulations, and (2) the eventual Saudi membership into the World Trade Organization.
For the Saudi economy, there is an additional challenge, namely, how to wean the economy away from too much dependence on oil.
