In view of the domestic drivers and upward revisions in official 2009 headline GDP as well as nonoil private sector and government economic growth rates, we are maintaining our GDP growth forecast at 3.9 percent for 2010, climbing to 4.2 percent in 2011. We have, however, decided to cut down our oil sector expansion forecast to 3.6 percent, while raising our projection for government sector GDP growth to 4.6 percent. This would be the fastest pace of growth for the government sector in 13 years as the state fires on all cylinders to meet fiscal outlay targets.
The average price of oil, which exceeded $80 a barrel in March and April, fell to $74 a barrel in May having dropped to the mid-$60 level, and is poised to have another volatile month in June. We are revising our annual oil price forecast to $76 a barrel from $78, leaving some room for a period of price weakness in the second half of the year. Crude prices averaged $79 a barrel in the first five months.
With oil above $70 a barrel, Saudi Arabia stands poised to post a budget surplus for the year, although it is likely to be smaller than our January assumption of SR77.9 billion, or 4.8 percent of GDP. Should oil prices hold above $75 a barrel, state spending would far exceed projected budget outlays, but if it falls below this level, the probability is that the government will strive to reign in spending to as close to budget allocations of SR540 billion as possible. State spending to push forward strategic energy, transportation and utilities projects is integral following such high-profile pullouts as the ConocoPhillips withdrawal from the Yanbu refinery project. As a result, a fiscal surplus of 3 percent of GDP looks more likely this year.
As European debt crisis contagion threats loom, we have argued that Saudi Arabia is largely shielded from the fallout by virtue of the fact that its banks' exposure to Europe is limited. Differentiation among Gulf states continues. The OECD recently raised risk ratings of Bahrain and the United Arab Emirates to level 3 from level 2, while Yemen's rating was upped to level 7 from 6. Risk ratings of Saudi Arabia, Qatar, Oman and Kuwait remain among the lowest. Gulf investors, including sovereign wealth funds, are exposed to European equity, debt and currency markets, so any stock market declines would affect the book value of such investments. However, the implications of the risk aversion attitude have already begun playing out. Saudi Basic Industries Corp. (SABIC) decided in May to delay a bond sale as Europe's debt crisis sent emerging market borrowing costs to many-month highs.
Nonoil government and private sector participants will steer most of the economic growth in 2010. New data of the Central Department of Statistics & Information (CDSI) show the government has revised 2009 real GDP growth to 0.6 percent from 0.2 percent as the global economy shrank 0.6 percent. Other than the Kingdom, only a few G20 nations posted economic growth in 2009: Argentina (0.9 percent), Australia (1.3 percent), China (8.7 percent), India (5.7 percent) and Korea (0.2 percent).
Virtually non-existent bank credit, private sector deleveraging and lower imports no doubt weighed on the sector's growth in 2009. However, the correlation between bank lending and private sector growth is not linear; the capacity of the private sector to draw on its own internal capital resources, accumulated during years of high economic growth, was likely higher last year than initially assumed. Saudi bank credit soared 27 percent in 2008 and private sector expansion was only 1.2 percent faster than it was in 2009, when bank claims on the private sector contracted slightly. Hence, the propensity of private firms to draw on existing capital resources was likely high.
To record such robust rates of economic growth in a year marked by severe global recession, and depressed oil prices and demand, signals state stimulatory spending program (including investments of $400 billion over five years) has succeeded to some degree at trickling down into parts of the private sector. This renews confidence in the robustness of counter-cyclical fiscal measures on the one hand and management of monetary and foreign investments on the other.
Unlike other countries, Saudi Arabia's level of domestic debt was a low 16% of GDP in 2009, a level we expect will fall to 13 percent this year, due to a rise in the nominal economy and the net paying off of state debt. The Kingdom is sitting on a substantial store of foreign assets - SR1.55 trillion in April - that will enable it to support expansionary spending in the medium term. We expect foreign assets will stand at SR1.62 trillion by the end of the year, with variation occurring due to oil revenues rather than SAMA's (Saudi Arabian Monetary Agency's) managed investment portfolio.
Given the sound fundamentals, we are maintaining our 3.9 percent 2010 GDP growth forecast, although we now expect the oil sector will expand 3.7 percent, down from our earlier estimate of 4.1 percent, based on oil and gas investments rather than output changes. The private sector, meanwhile, is being hit by deleveraging, volatile global confidence, downward pressure on global and local equities, and a lack of local and international financing. While we are keeping our private sector GDP growth forecast steady at 3.7 percent, we have decided to raise our government sector GDP forecast to 4.6 percent for 2010, up from a previous estimate of 4.1 percent. Our reasons for this strong upward revision in government sector GDP are plain to see. The state is shouldering the recovery effort, acting as the key financier of strategic projects as bank private sector loan growth remains subdued, which we have discussed in previous reports. In 2009, the government sector accounted for 23.1 percent of GDP, which we expect will rise slightly to 23.3 percent this year as the private sector's share falls very slightly to 47.9 percent. Oil sector GDP should account for 27.7 percent of GDP, according to our estimates.
Between 2005 and 2009, money remitted home from workers in the Kingdom soared 84 percent, in keeping with a notable jump in the number of new work visas issued. In 2009, 1.54 million work visas were issued, according to data of the Ministry of Labor, almost double the number granted in 2004. The increase happened as a result of a surge in the private sector work force, with the number of non-Saudis employed by private companies growing rapidly in recent years. Preliminary 2009 data of the Ministry of Labor show 6.21 million non-Saudis were employed by the private sector, up 15.2 percent from 2008 and almost 30 percent above 2006 levels. Private sector firms favor non-Saudi employees, who comprised 90% of the workforce in 2008, up from 87 percent in 2006-2008.
However, Saudi Arabia's unemployment rate reached 10.5 percent in 2009, up from 10 percent a year earlier, as market conditions tightened. Data from the Ministry of Labor indicate the number of foreigners hired by the private sector is nine times higher than that of Saudis. In 2009, foreigners employed in the private sector earned SR764 on average, while Saudis' pay stood at SR3,137 per month. The huge divergence in salaries between Saudis and non-Saudis is obvious and without administrative measure taken the gap will always favor the non-Saudi wage earners.
Imports amounted to SR324 billion last year, down 14 percent from 2008, but 6 percent above 2007 levels, according to CDSI. Initial 2010 CDSI trade data show import flows are cautiously improving, although February recorded a year-on-year dip of 5.7 percent, while in March they grew a meager 1.2 percent. The February drop was paced by a slowdown in machinery and electronic imports, which reversed slightly in March along with strong food imports.
A shift in the Kingdom's reliance on Asia in the past decade is likely to support Saudi trade flows even if the European debt predicament spreads beyond Greece. Asian countries, notably China and India, exhibit strong growth prospects this year even despite skepticism about the strength of China's growth story and the health of its property sector. From 2000-2009, the share of Saudi exports to Asia has grown rapidly, to 21 percent from 4 percent in the case of China, and to 14 percent from 10 percent in the case of India. Over the same period, Saudi exports to the world more than doubled while those to Asia grew more than three-fold. Greater reliance on Asia has formed a buffer for Saudi Arabia against contagion from the west. Asian economic growth is buoying up Gulf oil demand; OPEC expects oil demand growth in Asia of 2.2 percent in 2010, including a 5.5 percent rise from China.
(John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.)
