JEDDAH, 18 January 2005 — The Saudi economy enjoyed the best year of balanced performance in its history in 2004, with the oil sector strength supplemented by strong growth in most segments of the non-oil private sector.
Due to the oil sector’s capacity expansion and capital markets’ activity, momentum is just beginning, so the robust economic performance will continue through 2005, according to a report prepared by the Samba Financial Group on Saudi Arabian economy.
Samba’s figures showed that the real gross domestic product (GDP) grew by 5.3 percent reaching $248.48 billion. Nominal GDP increased by 16.9 percent.
“The Saudi economy ... earned $106 billion in oil export revenues in 2004, the highest in its history, and well above the average of $69 billion for the previous five years,” Samba said. This resulted in a current account surplus of $51.5 billion, and a fiscal surplus of SR98 billion ($26.1 billion).
The report described the performance of the Saudi economy in 2004 as “the best balanced performance in its history”, as most segments in the non-oil sector grew significantly along with the strong oil sector.
The Samba report added that the non-oil private sector grew 5.7 percent, its highest growth since 1982, the last year of the “oil boom” when the private sector grew 6.3 percent. The best performance came in telecoms, manufacturing, and construction.
Samba expected growth in real GDP to continue at 4.25 percent in 2005, although nominal GDP is forecast to diminish by 7.5 percent as it slides to $229.87 billion.
“We forecast two percent real growth in the oil sector, six percent growth in the private sector, and three percent growth in government activity, resulting in overall real GDP growth in 2005 of 4.25 percent,” the Samba Chief Economist Brad Bourland said.
Underlying the strength in the oil market was exceptional global growth in demand for oil in 2004, tightness in the world’s oil production capacity, and a variety of security and supply disruption concerns in major producing areas.
Saudi Arabia increased production to make up for supply shortfalls elsewhere and benefited from firm prices. Prices for Saudi oil averaged $35 per barrel in 2004, while the government based its 2004 budget on a Samba estimated $19 per barrel. Benchmark West Texas Intermediate (WTI) averaged $41.33 per barrel for the year.
According to the Samba report, prices for Saudi oil will average $30 per barrel for the year, and production will decline modestly from the 9 million bpd average of 2004, resulting in lower, but still strong, oil export revenues of $90 billion for Saudi Arabia in 2005.
The Saudi economy performed exceptionally in 2004, with historic oil performance augmented by the strongest growth in 22 years in the non-oil private sector. With the breadth and balance of the performance, the Samba report said 2004 was the best year in history for the economy. The 1974-1982 oil boom years were relatively one-dimensional by comparison. Growth then was almost all government spending of oil revenues to build infrastructure. The next period of high growth, 1990-1991, was war-driven.
Bourland said “In 2004, oil revenues were exceptional, resulting in large twin surpluses for the budget and the current account, GDP growth was high, inflation was tame, the stock market boomed, real estate continued strong, and the private sector across the board had a good year.”
Growth drivers in 2004 were more diverse than past growth periods. They included global oil demand strength, which is likely to continue and lead to a sustained step up in global appetite for Saudi oil.
Domestically, reforms taken over the past several years are now resulting in higher rates of non-oil private sector growth. The structural nature of the higher growth of 2004 gives confidence that 2005, and likely beyond, will also see robust economic performance in Saudi Arabia.
The Samba report also said that the global oil market defied all forecasts in 2004 with an explosion of demand, prices rising to $55 per barrel from $33 at the beginning of the year, and no detrimental impact on global GDP growth.
With the global economy not hurt by the higher prices in 2004, OPEC is now considering increasing its target price range from a $25 per barrel midpoint to $30 per barrel. With global spare capacity increasing, and demand growth likely to slow from the torrid pace of 2004, the key driver of prices should again be OPEC calibration of supply to keep prices near its target. However, the Samba report said oil prices will gradually come down in 2005 to average $35 per barrel for WTI and $30 per barrel for Saudi oil.
The implications for Saudi Arabia of these oil market dynamics are positive for the next several years, particularly if Saudi oil production steps up to a sustained higher level than during the past 20 years, and if an equilibrium market price moves to around $30 per barrel versus the $18 per barrel of the 1990s, both of which strike us as likely. A difficulty for the Kingdom’s economy for the past 20 years is that oil revenues never rose on a sustained basis. If production rose, prices declined, and vice versa, with the result being volatile, but essentially flat, oil revenues. Now that appears to be changing.
For 2005, the report said, the Kingdom will earn $90 billion from oil exports, assuming an average price of $30 per barrel and average production for the year of 8.8 million bpd, Saudi Arabia’s current OPEC quota.
The Kingdom ran its sixth current account surplus in a row in 2004 and the largest in its history at $51.5 billion. In merchandise trade, the Kingdom typically imports only about one third the amount it exports. In 2004, according to preliminary data from Saudi Arabian Monetary Agency (SAMA), the Kingdom earned $120 billion from exports.
For 2005, Samba expects oil and petrochemicals export receipts to decline somewhat, resulting in a merchandise trade balance of $63 billion versus $82 billion in 2004. With services and transfers remaining roughly steady in 2005, the report said the resulting current account balance to be a surplus of $30.7 billion.
A negative, but minor, aspect of the Saudi trade picture is the continuing depreciation of the value of the dollar, as the Kingdom pegs the riyal to the dollar. The dollar depreciated against the euro by 9.6 percent in 2004 after a 17.9 percent decline in 2003.
In 2004 the dollar also continued its decline against the yen (down 3.5 percent) and the British pound (down 13 percent). Dollar-denominated imports, from the US or from other countries, such as China, that peg their currencies to the dollar, made up over 25 percent of total imports in 2003. The prices of these goods for Saudi Arabia were not affected by the declining dollar.
In 2003, euro-denominated imports were 21 percent of total imports, the same as in 2002, showing that the strengthening euro had not had a large impact on imports from Europe in 2003.
The overall impact of the decline of the dollar in 2004 was to increase the cost of Saudi imports by a Samba-estimated SR5 billion ($1.3 billion). This is relatively minor in an overall trade picture of some SR140 billion ($38 billion) in imports. At the same time, Saudi Arabia would enjoy a minor benefit of increased competitiveness of its non-oil exports due to the depreciation of the dollar.
The Samba report said the major reforms that have contributed to the higher growth of 2004 included the restructuring of government agencies including water, electricity, labor, commerce and industry; the creation of the Saudi Telecommunication and Information Technology Authority; creation of the electricity regulatory authority; the establishment of the Capital Market Authority; enactment of the Foreign Investment Act, the Telecommunications Law, the Insurance Law, the Corporate Tax Law; and adoption of the privatization strategy.
The strongest growth in the private sector in 2004 came in telecommunications and transportation (up 7.8 percent), construction (up 7.5 percent) non-petroleum manufacturing (up 6.4 percent) and retail trade (up 4.9 percent).
The government’s preliminary data projects that nominal GDP, reflecting higher oil prices, grew 16.9 percent in 2004 to total SR931.8 billion ($248.5 billion), further cementing Saudi Arabia’s position as the largest economy in the Middle East, more than twice as large as the next largest economies of Egypt and the United Arab Emirates.
The 2005 budget is projected to be in balance with spending and revenues of SR280 billion ($74.7 billion). Overall, this represents an increase of 40 percent over the 2004 budget, a larger increase than seen in recent years, laying the groundwork for strong fiscal stimulus to the economy in 2005.
The Saudi stock market continued its rally for the sixth year in a row in 2004. The Tadawul All Share Index (TASI), rose 84.9 percent for the year, to stand at 8,206. Since this rally began in March 1999, the index, which stood at 1,327 at that time, is up 518 percent. Gains in the index were 43 percent in 1999, 11.3 percent in 2000, 7.6 percent in 2001, 3.6 percent in 2002, and 76.2 percent in 2003.
The Saudi market remains by far the largest in the Middle East, with a market capitalization of in excess of $300 billion.
There were two major IPOs in 2004, telecommunications company Ettihad Etisalat, and petrochemical company Sahara Petrochemical. Both had successful debuts on the market.
