JEDDAH: Saudi Arabia’s economy is heading for a rebound in 2010 and is expected to post real growth of around 4 percent. However, the impact of the global credit crunch and low oil prices has continued to depress activity in the non-oil economy, according to Samba Economic Monitor for January.
The Kingdom announced its 2009 budget in late December. The key feature of the budget is the projected deficit which is equivalent to around 5 percent of gross domestic product (GDP). “From the budget it is clear that the government will maintain spending in a bid to offset weakening private sector confidence and keep key infrastructure projects on track,” Howard Handy, chief economist of Samba Financial Group, said.
He added: “Given that the government holds deposits with the central bank (Saudi Arabian Monetary Agency) worth around SR1.1 trillion, the Kingdom is well placed to maintain its expansionary fiscal stance despite the deteriorating outlook for oil prices.”
Saudi Arabia’s crude oil output will be cut back sharply this year, and real growth will likely funnel resources through the banking system in order to keep key infrastructure projects broadly on schedule.
Yet with risk management to the fore, this is unlikely to herald a resurgence in commercial bank lending growth on the same levels witnessed in recent years. Rather, banks are likely to maintain a cautious approach, waiting for global economic prospects to improve and for international banks to renew their interest in Saudi corporate debt before significantly increasing lending. This should begin to happen toward the end of this year, though prospects for the global economy remain fraught with uncertainty, the Samba report said.
Private consumption has continued to fall in the Kingdom. The nearest proxy — point of sales transactions — showed some improvement in November 2008, but this is unlikely to point to a lasting rebound given the direction of oil prices and the wealth effect of the slumping stock market.
Oil prices slid close to a four-year low under $33 per barrel yesterday.
New York’s main contract, light sweet crude for delivery in February, fell as low as $32.70 a barrel. In London, Brent North Sea crude for March dropped 71 cents to $43.78 a barrel.
Oil prices have fallen by more than three quarters since record highs above $147 a barrel last July.
“Saudi Arabia is expected to reduce crude oil output by around 14 percent this year to an average of just over 7.9 million barrels a day. Ongoing investment, especially in gas, will offer some support, but the crude cutback means that sector is set to contract by around 10 percent this year. This will have a significant impact on overall GDP which might contract by around 1.5 percent this year,” Handy said.
Though data on investment are not available, a number of private industrial and infrastructure projects have been mothballed or canceled, and more are likely to follow given the financing constraints, the report said. Projects either on hold or canceled
amounted to $28 billion in mid-January (MeedProjects), while a number of projects in the early planning stages are being shelved. The $28 billion represents only around 4 percent of the $660 billion of projects in various stages of development, but the trend is clear, Handy said.
Nevertheless, there are signs that the public sector is prepared to provide additional finance in order to keep key infrastructure projects afloat, he added.
Saudi Arabia’s inflation has started decelerating, reflecting the slowdown in domestic economic growth and weakening global commodities prices. November consumer price inflation eased to 9.5 percent, down from 10.9 percent in October. “Price growth should continue to ease, though still-strong rental growth will keep inflation high by historical standards,” Handy said.
