JEDDAH, 5 February 2007 — Despite a collapse in share prices that knocked over $500 billion off the capitalization of the stock market, Saudi Arabia’s economic performance was exceptionally strong in 2006.
Samba Financial Group said in a report that last year high oil prices pushed the budget and current account surpluses to record levels, but nominal growth remained in double digit, real non-oil private sector growth was well above its 10-year average and inflation was relatively subdued.
However, the Samba report said the softer oil market this year would make headline numbers for Saudi Arabia look weak in year-over-year comparisons. As oil production declines in 2007, the 30 percent of the economy that is made up of the oil sector is expected to contract by 6.3 percent in real terms. Because revenues will be lower, the nominal oil sector GDP will also fall — by a Samba forecast 14 percent.
Soaring oil prices have generated double-digit growth in nominal GDP in each of the last four years. Over this period the Saudi economy has almost doubled in size to $348 billion.
Official growth data for 2006 show that the economy performed reasonably well last year despite a 53 percent fall in the stock market. Real GDP grew by 4.2 percent. This is lower than the rate recorded in 2005 because of a decline in oil production of around 3 percent. Non-oil private sector growth also eased slightly, though at 6.3 percent it was well above its 10-year average. Non-oil industry was the fastest growing sector, though at 6.3 percent it was well above its 10-year average. Non-oil industry was the fastest growing sector, at 10.1 percent, spurred by higher petrochemicals and metals production. Transport and communication expanded by 9.5 percent owing in part to the rapid increase in mobile phone subscribers and road transportation services.
“This period of strong nominal growth appears to have passed. We expect the economy to shrink for the first time since 2001 this year and there is little chance of further large oil price rises over the next few years. Earlier booms in the mid-1970s and the turn of the 1980s collapsed when declining oil revenues forced the government to cut back spending. However, this boom is different. This should be demonstrated in 2007, which we expect to be the start of a period in which the non-oil sector can grow robustly despite little, if any, growth in oil revenues,” Brad Bourland, general manager and chief economist of Samba Financial Group said in the report.
He said “on the face of it real GDP growth in line with our expectation for this year of 2.4 percent in not impressive. Real growth was 4.2 percent last year and 6.5 percent in 2005.”
Bourland said “With work commencing on mega projects and others coming to fruition, manufacturing, construction and transportation are all likely to continue to post robust growth.”
The Samba report said work started last year on the $27 billion King Abdullah Economic City, one of the largest of the mega projects. During 2007 construction is set to commence on more of the six planned economic cities as well as the King Abdullah Financial District in Riyadh. Details of the fourth economic city, in Jazan, were announced in the last quarter of 2006. Heavy industry is the focus of the new city, which will host an oil refinery and integrated petrochemical complex, a copper refinery and smelter, an aluminum complex and an integrated alumina refinery. The ban estimates that projects worth over $300 billion are under way or in advanced planning for execution over the next few years.
The transportation and communications sector will benefit from the growth in construction, as a huge volume of raw materials have to be moved to their construction sites. The first full year of lower fuel prices will further stimulate the transportation sector. New mobile and fixed line telecoms licenses are due to be awarded this year, buoying momentum in the communications sub-sector, which continues to experience rapid growth stemming from a rapid increase in mobile phone subscribers.
The Samba report said petrochemicals dominate the major manufacturing projects entering production. The largest will be the Saudi Basic Industries Corp. (SABIC)-led $5 billion Yanbu National Petrochemical company (YANSAB) project in Yanbu. Once at full capacity, YANSAB will produce 1.3 million tons per year of ethylene, adding around 15 percent to the Kingdom’s total production capacity, together with significant quantities of ethylene glycol, polyethylene and polypropylene. Smaller petrochemical facilities owned by other companies are expected to enter production in the industrial cities of Jubail and Yanbu.
Another factor supporting growth in 2007 will be greater stock market stability. A collapse in share prices starting in late-February had a clear impact on the performance of some sectors last year. Growth in the retail sector slowed as many investors who made losses in share trading were forced to cut spending. Many more Saudis may have trimmed their spending due to a negative wealth effect. Even though most Saudis who bought shares more than two years ago or through Initial Public Offerings (IPOs) would still be carrying a profit, the fact that the shares were worth nearly three times as much earlier in the year has created large losses since the market peak.
