RIYADH, 21 December 2004 — Saudi Arabia expects a healthy global economy in 2005 to sustain demand for its oil and petrochemical exports through next year and beyond, a senior central bank official said on yesterday.
“Our confidence in the Saudi economy is as high as it has ever been and we expect it to continue,” Muhammad Al-Jasser, vice governor of the Saudi Arabian Monetary Agency (SAMA) told Reuters in an interview.
The world’s biggest oil exporter unveiled an expansive 2005 budget this month after reaping the highest revenues for its crude since the oil boom more than two decades ago.
That oil income helped fuel Saudi growth of seven and five percent in the last two years and officials say domestic reforms and the robust world economy could keep it powering ahead.
“The global economy, which is significant for us, still looks to be performing well in 2005,” Al-Jasser said. “China, Asia and the US are expected to continue to perform well and even Europe looks like it is going to continue to have decent growth”.
“So the demand for our products, be it oil or petrochemicals and others should continue. With the drive for more exports from our economy, we should be seeing a good year in 2005.”
Unexpected growth in demand from China and others for oil and a lack of additional supplies outside the Gulf have been the main factors behind market fears of crude shortages which drove prices up to record levels earlier this year.
Al-Jasser declined to predict Saudi Arabia’s oil revenues next year or the country’s economic growth. “But I lean more toward optimism than pessimism,” he said.
Government revenues this year of SR393 billion ($104.8 billion) — mostly from oil sales — were no windfall, he said.
“Windfall is something which happens when it was not supposed to. I believe it was a recovery in the global demand for oil,” he said. “And therefore what happened was long awaited as far as we were concerned.”
Oil prices reached a record $55 per barrel but in real prices, allowing for inflation, they still fell well short of levels in 1980 and 1981.
In the intervening years Saudi Arabia suffered the double blow of lower earnings per barrel and sharply reduced oil output aimed at stemming the price collapse.
It is now pumping money back into infrastructure, power and water projects starved of cash for several years as well as education and training programs needed to address Saudi unemployment and dependence on millions of foreign workers.
Al-Jasser said global prospects suggest that oil demand will continue growing, while new supply from countries outside the Gulf region was unlikely to appear soon, despite the attraction to producers of higher world prices.
“That is the source of my optimism,” Al-Jasser said. “I wait to see what other producers outside our region are doing about investment in oil, but it takes time”.
Domestic reforms, including the establishment last year of a capital market authority and an expected flow of initial public share offerings on the Saudi stock market, will also drive the economy in 2005, he said.
Al-Jasser also saod that the weak dollar is not causing serious discomfort to Saudi Arabia because European and Japanese exporters are absorbing some of the slide to keep their goods competitive. “Definitely there is an effect on purchasing power.” But although both the euro and yen have gained sharply “not all of that is passed through”, he said. Saudi Arabia pegs its riyal to the dollar and also prices its crude exports in the US currency.
Minister of Petroleum and Mineral Resources Ali Al-Naimi has justified higher world oil prices in part because the weak dollar has curbed Saudi purchasing power.
The current dollar value “is not uncomfortable”, Al-Jasser added, and Saudi Arabia has given no serious consideration to changing the dollar link to the riyal and oil prices.
“I am not aware of any serious consideration of shifting (oil prices) to the euro, partly because we have not seen any credible analysis yet that there is a significant loss to us because of oil’s peg to the dollar. The dollar remains a natural hedge for us,” Al-Jasser said.
Saudi Arabia and its five partners in the Gulf Cooperation Council plan to unify their dollar-pegged currencies by 2010 and the United Arab Emirates has suggested floating the single currency a few years later.
But Al-Jasser said it was premature to say whether the unified Gulf currency should float or be tied to a single currency or a basket of currencies.
“There is no preference,” he said. “By 2010 when you introduce the currency you don’t know what kind of foreign exchange regimes will be there in the world at that time.”
“The arrangement we have now has served our economies very well and is still serving the economies well and there is no reason to consider changing the arrangements”.
Saudi banks should watch their loan portfolios carefully after a strong rise in consumer lending, but authorities believe banks are more than adequately covered, Al-Jasser said.
Al-Jasser said Saudi banks have seen a “healthy growth in consumer lending” after years of complaints that they would only lend to corporates and the super-rich.
“Consumer lending is a recent phenomenon,” he told Reuters.
Consumer lending has formed a major part of the increase in bank loans to the private sector, which rose 40 percent from January to October to hit SR330 billion ($88 billion).
That represents 84 percent of total bank deposits, compared with an “indicative” SAMA guideline for the banks of 70 percent.
Much of the SR39 billion surge in October was a temporary blip as Saudis borrowed money to apply for the hugely oversubscribed offer of shares in a mobile phone operator.
“We review with the banks to ensure their diversification is reasonable and the portfolio is not skewed to one area, but we don’t give hard numbers,” Al-Jasser said.
“Seventy percent may be good in one bank, too high in another and too low for another,” Al-Jasser said. “We look at capital adequacy ratios more closely than we look at that one”. “We’re not going to tell them you can’t lend to these good projects”.
