JEDDAH, 26 July 2006 — The economic boom in Saudi Arabia continues to gather pace, with 2006 likely to see record oil revenues, and record trade and budget surpluses in an overall context of 20 percent growth and low inflation.
According to a mid-year 2006 report about the Saudi Arabian economy by Samba Financial Group, the Kingdom will earn over SR760 billion ($203 billion) in oil export earnings this year, an all-time record, up 25 percent from the record last year of SR608 billion ($162 billion). Even while allowing the government to provide strong fiscal stimulus to the economy, the oil revenues are not being spent as fast as they are being earned. Of the roughly SR64 billion ($17 billion) per month in oil export earnings, about SR26 billion ($7 billion) per month is accumulating as foreign assets at the central bank.
“The boom is only beginning, with signs that strong oil prices and revenues will last many years, a government fiscal position that can support growth in spending for years, and mega projects just getting under way that will carry high growth through 2010 and beyond,” Brad Bourland, general manager and chief economist of Samba Financial Group, said.
Oil prices hit all-time highs during the first half of the year and ended the half at $74 per barrel (West Texas Intermediate, WTI). According to the Samba forecast, WTI will average $68 for the year, and the average price for Saudi crude oil will be $62.50 per barrel, well above the $38 per barrel needed to meet the Saudi government’s budget revenue projections. Saudi oil production is likely to average 9.4 million barrels per day (bpd) in 2006, the same as in 2005.
The Saudi stock market, which experienced a sharp rise followed by a decline, attracted the most attention in the first half of the year. From the top in late February to the bottom in early May, the market moved down 54 percent.
From year-end 2005 to the end of June 2006, the market was down 21 percent. The downturn does have economic implications — a likely slowdown in retail sales, business investment, and banking sector earnings growth. These are more than offset, however, by the strength of the oil market, and Samba has revised upward its forecasts for GDP growth for 2006. The aspect of the stock market that continued to generate wealth is the Initial Public Offerings (IPOs). At the end of June 2006, every IPO since 2003 remained profitable, some extremely profitable, from the offering price.
The Samba report said, besides oil and the stock market, the other major factor of the first half of 2006 was mega projects. Large infrastructure investment is surging. Samba assessment of major project activity shows some 37 major projects that are under way or have a high likelihood of implementation over the next several years with a total value of SR1.06 trillion ($283 billion).
Hydrocarbons-crude oil production, refining, and petrochemicals production-dominate, especially where private sector investment is concerned, but projects are in a wide array of industries and geographically dispersed around the Kingdom.
The bank’s macroeconomic forecast is for nominal GDP growth of 20 percent this year, and real GDP growth of 5.8 percent. The non-oil private sector will grow 8.9 percent in real terms, the highest growth in 25 years. Inflation will be under 2 percent.
The report said the strong oil export earnings will be the main factor behind a likely current account surplus of SR428 billion ($114 billion), the eighth surplus in a row.
Government finances are also strong and growing stronger. Even with likely spending growth of 20 percent over 2005 levels, the government will still run a record surplus this year of SR250 billion ($67 billion). Government debt, all domestically held and riyal-denominated, will decline to about SR380 billion ($101 billion), or 27 percent of GDP.
Foreign assets at the central bank will grow to about SR840 billion ($224 billion), enough to provide budgetary support for years to come and defend the currency’s peg to the dollar.
There was speculation recently of a revaluation upward of the riyal’s exchange rate against the dollar. The Saudi Arabian Monetary Agency (SAMA) made clear this is not going to happen anytime soon.
These strong conditions — high oil revenues, stimulative fiscal policy, robust non-oil growth, low inflation, and surging investment in major projects — are likely to continue well beyond 2006. The challenges to emerge will be those associated with managing high growth — keeping inflation under control, ensuring that investment in fixed assets and government spending remain efficient, and keeping surging imports from overtaking exports. Having such challenges, however, is the envy of many economies around the world, the Samba report pointed out.
