JEDDAH, 23 October 2005 — The booming Saudi economy is at its best performing period ever with oil export revenues hitting 22-year highs and the real gross domestic product (GDP), as a result of the higher oil production than in 2004, growing at a phenomenal 6.8 percent.
A new climate of hope about the pace of economic reforms and several developments that have occurred early in Custodian of Two Holy Mosques King Abdullah’s reign indicate that the growth will be optimal in this boom cycle. It will also enable the country to strengthen its fiscal position as revenues continue to be robust.
Saudi Arabia’s accession to the World Trade Organization (WTO) is now visibly close, as the final major hurdle, a bilateral trade agreement with the US, was reached in September. The king instituted a 15 percent salary increase for government employees as well as announcing how a portion of the excess oil revenue will be spent.
According to Samba Financial group’s third quarter economic update on Saudi Arabia, oil export revenues will hit a 22-year high of a Samba-estimated $163 billion and the Kingdom will have a very healthy trade balance and a current account surplus of $101 billion.
Real GDP will grow at 6.8 percent as a result of higher oil production than in 2004, but also due to non-oil private sector growth, which the financial group now expects to grow at 7.9 percent in 2005 and to further pick up pace in 2006.
Through 2005, record high global oil prices will help sustain Saudi oil at an average price of $51 per barrel. High prices for Saudi oil will likely be sustained through 2006. The report also said fiscal performance will be strong. “We anticipate a budget surplus of SR208 billion, a gradual, yet continuous reduction of government debt to SR595 billion, or 49 percent of GDP, and a continuous build-up of central bank foreign assets, which we forecast will stand at $141 billion at year-end 2005,” Samba Chief Economist Brad Bourland said.
“We have upped our previous estimate of 6.5 percent real GDP growth (August 2005 mid-year report) for 2005 to 6.8 percent. We believe that both the oil and non-oil sectors will show strong growth, the former due to increases in oil production compared with last year’s output,” he added.
The report said the oil sector is set to grow in real terms by 7.2 percent. The non-oil private sector is set to grow by 7.9 percent. The government will grow by 3.9 percent in 2005. Liquidity as measured by overall money supply (M3) has grown through August by nearly 7 percent and we estimate it will grow by over 14 percent for the entire year. Money supply growth fell during July and August, but will pick up robustly from September through year-end 2005.
Bourland said “looking into 2006, we anticipate the economy to continue to grow, albeit at a lower rate compared with 2005 growth. As long as global economic growth continues its current strong path, oil revenues will not decline going into 2006. Due to US inflationary pressures, interest rates appear likely to continue to rise in the first quarter of 2006 in the US and Saudi Arabia.”
However, higher interest rates will not affect the Saudi economy, which the report said, will enjoy another impressive year:
• Oil revenues will continue to be strong, giving another year’s boost to the budget.
• Real GDP is expected to grow by 5.1 percent. The non-oil private sector will grow by 8.5 percent.
• Inflation will climb to 1.6 percent, but it will not create any macroeconomic distortions.
Higher interest rates will also help moderate inflationary pressures.
• Government spending will increase with prudent management and fiscal discipline and a likely budgetary surplus.
• The current account is expected to record a surplus of $94 billion, the eighth year in a row of surplus.
The Kingdom’s finances are strong, and all trends indicate a strong fiscal position for the next few years. For 2005 revenues to total SR551 billion as a result of higher oil revenues and other non-oil revenues. Spending will total SR343 billion. This will lead to a surplus of SR208 billion. The 2006 budget will be expansionary, based on a higher, and more realistic, oil price assumption than the $25 per barrel assumption behind the 2005 budget.
As government revenues rise, government debt is falling. According to Samba estimates government debt to amount to SR595 billion at year-end 2005, equivalent to 49 percent of GDP. This is a significant improvement within a three-year period. The current boom is helping the government build up its foreign assets, which have nearly tripled since 2002 from $41 billion to $122 billion by August 2005.
Bourland said the 15 percent raise would add about SR20 billion to the money supply in 2006. The wage component of the 2005 budget is about SR130 billion, or less than half of the budget. Over the next 5 years, the pay raise will cost around SR105 billion. Given the overall budgetary strength, the government will easily manage the salary raise for many years, without failing into to deficit spending, given likely oil market conditions.
The salary increase will affect a large portion of the Saudi labor force. An addition of SR20 billion in 2006 would be an increase of 5 percent on current money supply. As M3 grew in 2005 by 19.1 percent without causing much inflation, the salary increase is not likely to cause much inflation.
In August 2005 (mid-year) report, Samba noted that the economy is entering a boom cycle. Based on third quarter developments, it revised 2005 forecasts are as follows:
• The strong global oil market will help sustain Saudi oil prices at an average price of $51 per barrel for 2005.
• Real GDP for 2005 is set to climb 6.8 percent, the highest growth level achieved in the country for the past two decades. Nominal GDP will grow 29.8 percent, a phenomenal rise by any economic standards, and driven by the rise in oil prices.
• The country is strengthening its fiscal position as revenues continue to be robust. For 2005 we expect government budgetary revenues to total SR551 billion, spending to total SR343 billion, for a resulting surplus of SR208 billion.
• The current account will be stronger than previous forecast of $96 billion. It will reach $101 billion at the end of 2005.
• As the government expands its spending programs, like the recent 15 percent government salary increase, the economy will experience some price inflation, especially in the Kingdom’s urban areas. From a previously Samba estimated inflation of 0.7 percent, we anticipate that by the end of 2005, inflation will stand at 1.0 percent, still at a very healthy level.
