Saudi GDP to rise 6.1% in 2011

Inflation may also rise while fiscal balance will record surplus: bank

Strong oil prices will ally with higher crude output and a sharp rise in public expenditure to boost Saudi Arabia’s economy by nearly 6.1 per cent in 2011 while a budgeted deficit will turn into a large surplus.

Recovering domestic credit and vast financial benefit initiatives announced by King Abdullah over the past two months will also spur growth in the world’s dominant oil power but this could also fuel higher inflation rates, the Saudi American Bank Group (SAMBA) said in a study.

From around 3.8 per cent in 2010, real GDP growth in the largest Arab economy is projected to accelerate to 6.1 per cent this year before slowing down to around four per cent in 2012, SAMBA said in its monthly economic bulletin.

In current prices, GDP is forecast to leap by nearly 19.5 per cent from around $431.5 billion in 2010 to $515.6 billion in 2011, the study said.

SAMBA said higher growth would be a result of a surge in public spending, strong crude prices and higher oil production by the Kingdom, and a recovery in bank domestic credit after two years of a post-crisis slowdown.

Its figures showed bank lending to the private sector grew by nearly 6.9 per cent in the twelve months to April. The study said the increase represents a reasonable pick-up on the 5.7 per cent growth registered in December, particularly given the backdrop of regional political uncertainty.

“With these concerns now receding and private investment demand hardening, credit growth seems likely to accelerate as we move through the year.”

But the report noted that such developments would stoke inflation although the rate would remain far below the record high level of 2008, when inflation in the Kingdom jumped to nearly 9.9 per cent.

“The rising trend in output prices is now beginning to feed through into the consumer price index,” the report said.

“This is not obvious from the headline year-on-year data: the overall index edged up only slightly to 4.8 per cent in April, from 4.7 per cent in March, and is still some way down on the 5.4 percent registered at end-year 2010. Nevertheless, on a month-on-month basis the trend is determinedly upward.”

Its forecasts showed inflation in Saudi Arabia, which controls over 20 per cent of the world’s proven oil wealth, would edge up from around 5.4 per cent in 2010 to 5.7 per cent in 2010 and pick up to 6.4 per cent in 2012.

“Much of the increase in inflation this year was food-related…commodity prices might now be stabilising (or even reversing) suggesting a weaker impulse from food in the third quarter,” the study said.

“But inflation is also being generated by hardening demand: the volume of points of sale transactions (a proxy for retail sales) grew by 31 per cent in the twelve months to April, with firmer growth expected in the second half of the year as salary increases and other benefits continue to feed through. Much of this spending will be directed towards imports, but there will also be upward pressure on the price of domestic non-tradeables.”

According to the study, the surge in oil exports is expected to widen Saudi Arabia’s current account surplus from around 15.6 per cent of GDP in 2010 to 16.4 per cent in 2011 before it recedes to 10.3 per cent in 2012.

A budgeted deficit of SR40 billion will also turn into an actual surplus of 6.3 per cent in 2011 compared with 6.7 per cent in 2010.

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