JEDDAH, 19 February 2007 — A correction in the stock market failed to have a major impact on Saudi Arabia’s economic performance last year. Saudi Arabia’s economy was in fact exceptionally sound and robust in 2006. After joining the World Trade Organization (WTO), Saudi Arabia embarked on the mammoth projects of economic cities which will have a long-lasting impact on the macro-economic policies and on the fundamental structure of the Saudi economy, according to a report received here from the Kuwait-based Global Investment House (Global) on Saudi Arabia’s economic and strategic outlook. After the strong growth seen in 2003-05, the Saudi stock market underwent a correction and ended the year 2006 at 7,933.29 points, down a whopping 52.53 percent over the 2005 close of 16,712.64 points.
Saudi Arabia’s nominal gross domestic product (GDP) is estimated to have grown by 12.4 percent in 2006, reaching SR1.30 trillion ($346.9 billion) while real GDP is estimated to have grown by 4.2 percent to SR799.9 billion ($213.3 billion). The nominal GDP over the period 2002-06 grew at the CAGR of 16.5 percent as the high prices and production levels in 2005-06 kept GDP on a high growth path.
Kingdom’s nominal GDP grew by SR707 billion in 2002, SR804.6 billion in 2003, SR945 billion in 2004 and SR1,157 billion in 2005.
However, in 2006, production levels on account of OPEC cuts due to declining prices had its effect on the GDP growth as it recorded only 4.2 percent real GDP growth in 2006 as compared to 6.3 percent recorded in the previous year. The Global report said oil sector grew by 16 percent while the private sector grew by 7.9 percent in nominal terms in 2006. The strong capital expenditure projects that the Saudi government has lined up are expected to add significantly to the GDP growth in the coming years.
“The fiscal surplus currently witnessed is being invested in infrastructural projects which will further benefit the other sectors of the economy. This will have the effect of broad-basing the economy (diversification) along with the job creation which is much needed in the burgeoning economy,” the report said.
Saudi Arabia’s 2007 budget projected the revenues at SR400 billion and expenditure at SR380 billion resulting in the surplus of SR20 billion. The revenues are 38.9 percent lower than the year 2006 actual figures of SR655 billion. It is to be noted that the actual revenues of 2006 were higher by 68 percent than the budgeted revenues reported for 2006 indicating the conservative estimates maintained by the government while preparing the budgets.
In the new budget, the government continued to pay special attention to impart quality education and improving the technical and managerial skills of its nationals. Manpower development continued to account for one of the largest allocations in the budget and accounted for 25.4 percent of the total budgeted expenditure for 2007.
According to the budget report of 2007 released by the Ministry of Finance, the public debt is expected to drop from SR475 billion in 2005 to SR366 billion, accounting for 28 percent of GDP. The government has been using its fiscal surplus in the last few years to settle part of its outstanding public debt. As result, the debt as percent of GDP declined from 93.3 percent in 2001 to the current 28 percent.
The trade balance is estimated to record a surplus of $147.6 billion in 2006, registering an increase of 17.5 percent. The current account balance increased to $102.7 billion in 2006 as compared to $90 billion recorded in the previous year.
As a result of movement toward monetary union, the Saudi Arabian Monetary Agency (SAMA) has maintained and is likely to maintain the Saudi riyal peg to the US dollar.
SAMA continued to adopt policy to support the domestic economic growth and tried to keep exchange rate stable. During the first quarter of 2006, SAMA raised the official repo rate one time by 25 basis points, from 4.75 percent at year-end 2005 to 5.00 percent at the end of the first quarter.
In the second quarter of 2006, SAMA raised the repo rate one time by 20 basis points, from 5.00 percent to 5.20 percent.
SAMA earlier this month raised the benchmark repo rate and the reserve repo rate by 30 basis points to 5.50 percent and five percent respectively.
Money supply (M2) registered growth of 14.9 percent for the same period. According to Ministry of Finance, inflation, as measured by the Consumer Price Index is estimated to have increased by 1.8 percent in 2006 while the non-oil GDP deflator has reported a yearly increase of 2.1 percent in 2006.
Saudi Arabia’s expanding economy also received a big boost as Standard & Poor’s Ratings Services raised its long-term foreign currency credit rating from “A” to “A+” on the basis of its excellent financial performance. The rating agency also affirmed its long-term local currency rating at A+ and short-term sovereign credit rating at A-1.
The outlook on both the foreign and local currency ratings is stable.
Fitch Ratings also upgraded Saudi Arabia’s foreign currency and local currency Issuer Default ratings (IDR) to “A+” from “A”, and affirmed the short-term rating at ‘F1’. The outlook remains Stable. At the same time the agency has revised Saudi Arabia’s country ceiling rating to “AA-” (AA minus) from “A”.
According to Fitch, the upgrade is due to strengthened external and domestic balance sheets, ongoing economic and structural reforms, reflected in an accelerating pace of private sector growth, and a reduction in domestic political risk.
Saudi Arabia has been the largest oil producer in the GCC and accounts for almost 10 percent of the world oil production. Most of the oil reserves of Saudi Arabia are controlled by the state-run Saudi Aramco.
According to Ministry of Petroleum & Mineral Resources, total crude oil reserves amounted to 264.2 billion barrels at the end of 2005 in 82 discovered oil fields. The production increased from 3.25 billion barrels in 2004 to reach 3.4 billion barrels in 2005, out of which 2.6 billion was exported. Saudi Arabia’s gas reserves are estimated today at 243 trillion cu.ft., ranking fourth in the world.
