Kingdom Set to Post 8.7% Growth

Author: 
Khalil Hanware, Arab News
Publication Date: 
Tue, 2005-04-26 03:00

JEDDAH, 26 April 2005 — Saudi Arabia’s economy is expected to grow 8.7 percent this year, fueled by high oil prices and production levels, as well as strong private sector growth.

Riyad Bank said in a report released on Sunday that the Saudi economy, in stark contrast to the global economy, continued to set and break new records throughout last year. During the “Third Oil Boom” in Saudi Arabia, which started in 2003, the Saudi stock market more than quadrupled its value. It has been making new all-time records almost on a weekly or monthly basis. The level of initial public offering (IPO) activity has “picked up to a frenzy.” Liquidity and bank credit are at all-time highs, so much so that the banking sector’s loan-to-deposit ratio has reached a record level.

The report predicted 8.7 growth in gross domestic product this year, after 5.3 percent last year and 7.2 percent in 2003. It said the private sector would also see strong growth of 6.0 percent this year, after 5.7 percent last year and 4.1 percent in 2003.

The government announced recently the highest private sector growth (5.7 percent in real terms) ever in the last two decades and the second highest ever budget surplus of SR98 billion.

Riyad Bank Chief Economist Khan H. Zahid said, “We expect the Saudi economic boom to continue this year. With rising oil prices driven by the growth in global demand, oil price and production are expected to be significantly higher than last year’s levels. Thus, we forecast the private sector to grow at 6 percent rate in real terms against last year’s 5.7 percent.”

The report said that the overall economy — which includes oil, non-oil government and the private sectors — is forecast to grow 8.7 percent this year against 5.3 percent in 2004. The government’s budget is forecast to show an even stronger surplus of SR187 billion against SR98 billion in 2004 due to higher oil price and production. Surpluses from the last two years — which followed nearly two decades of budget deficits - have been used to build up foreign reserves and cut domestic debt to two thirds of GDP.

Riyad Bank based its prediction on a forecast average Saudi output of 9.8 million barrels per day (bpd) and a price of $42 a barrel for Saudi crude.

It predicted total government revenues of SR495 billion ($132 billion) and a huge surplus of SR187 billion — the third in a row and by far the largest.

The bank forecast assumes a 1 million bpd increase in OPEC production later this year, most of it from Saudi Arabia, to try to reduce prices which hit a record $58.28 for US light crude oil this month.

Brent crude averaged $38.19 in 2004, compared to the previous all-time record of $35.69 set in 1980 and $28.83 in 2003. Brent crude prices started the year 2004 at around $30. Most analysts were forecasting a fall in price at that time. But a combination of factors led to oil prices reaching the $50- $55 a barrel range in October. Brent crude reached a peak of $52.28 on Oct. 23 and US light sweet crude (WTI) reached a peak of $55.67 a barrel on Oct. 24, 2004.

Industry sources say Saudi Arabia is pumping 9.5 million bpd and intends to boost output toward 10 million barrels in May to help build stocks before an expected end of year demand surge.

The Kingdom, already the world’s biggest oil exporter, is the only producer with significant excess production capacity.

The double boost from high prices and production has pumped extra income into the Saudi economy, boosting government spending and driving a major expansion in the private sector.

The government has pledged to pour money this year into new water, sewage and desalination projects, as well as roads, schools, universities and hospitals — many of which were starved of cash in the lean years of the 1990s.

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