Saudi economy poised for “immense” recovery

Strong oil prices will ally with improving credit and higher investment inflows to sharply boost Saudi Arabia’s economy in 2010 and 2011 after recording its slowest rate in eight years, the Gulf Kingdom’s largest bank said on Sunday.

After soaring to one of its highest levels in 2009, foreign direct investment (FDI) is projected to swell further this year while inflation could end the year slightly higher than in 2009, National Commercial Bank (NCB) said.

In a study entitled “the Kingdom Marching to Recovery”, NCB forecast growth at 3.7 per cent in 2010 and around four per cent in 2011 compared with only 0.6 per cent in 2009, its lowest growth level since 2002.

The study, sent to Emirates 24/7, said that despite the sharp slowdown in 2009, the Kingdom’s economy, the largest in the Arab world, escaped a “technical recession” that has befallen many other countries.

In 2009, real GDP growth decelerated to around 0.6 per cent, mainly due to the negative contribution from the oil sector, stemming from a lower production.

But the study noted that the contraction in the oil sector was more than offset by non-oil GDP growth in 2009, pushed by rising government spending.

As a result, the non-oil deficit, a measure of the contribution of the fiscal stimulus to domestic demand, increased to 35 per cent of gross domestic product last year from around 22.5 per cent of GDP in 2008.

“However, the economic growth outlook for 2010 has improved immensely with the global economy settling down and growing again,”NCB said.

It said the Kingdom’s economy is gaining traction through three main channels-- (1) higher oil prices are expanding the dominant source of government revenues; (2) improvement in global demand for oil has motivated lower compliance to OPEC production cuts, and (3) stellar foreign capital inflows and resumption of private-sector credit continue to support the non-oil sector.

“We are now forecasting real GDP growth to rise by around 3.7 per cent in 2010 and four per cent in 2011, as the expansion in the oil sector is projected to complement the non-oil sector continued positive contribution to overall growth…. ..our assumption centers on a sustained recovery in global demand and higher oil production level during the forecast period.”

The study expected the oil sector’s contribution to economic growth to turn positive, but will remain modest in 2010.

It noted that in 2009, successive cuts in production that accumulated to a sizable 1.11 million barrels per day had weighed negatively on the oil sector that contracted by a substantial 6.70 per cent year-on-year.

It added that the rate of production cuts gained momentum in the fourth quarter of 2008 as weaker global growth imposed strong downward pressures on crude oil prices, a fact that culminated in OPEC’s decision to institute a 4.2 million bpd production cuts throughout last year.

“Nevertheless, the growing optimism during 2010 regarding the pace of global recovery and strong signs of demand rebounding in emerging markets had reduced the strict adherence to production cuts by OPEC members,” it said. “According to our estimates, Saudi crude oil production is expected to have increased by an average of 200,000 bpd, reaching 8.3 million bpd, which will expand real oil GDP by about 2.3 per cent in 2010.”

But the report expected the sector's contribution to overall economic growth to be only around 0.64 per cent. In nominal terms, with the weighted average Arab light prices rising from $59.2 in 2009 to estimated $75 in 2010, oil revenues are expected to jump by 38 per cent, it said.

“This will allow the government to continue the implementation of the development programs. In 2011, the contribution of the oil sector to real GDP growth would remain positive but modest as well, especially that our estimates do point that crude production will not cross the 8.5 million bpd threshold.”

Turning to investment, NCB said it expected FDI inflows to maintain elevated levels well into 2010 after reaching around $35.5 billion in 2009.

“We believe that FDI is driving overall investment spending in the Kingdom higher, as the share of FDI in gross fixed capital formation (GFCF) increased significantly, from an average of one per cent in the period 1990-2000 to a remarkable 43.5 per cent in 2009,” it said.

It attributed the surge in FDI inflows to several factors, including the extensive number and diversity of projects currently underway, amounting to around $695 billion and the substantial surge in investment expenditure by both the private and public sectors, leaping from 17 per cent of GDP in 2006 to nearly 25 per cent of GDP in 2009. Other factors are the positive contribution from private consumption, attributed to population growth and rising GDP per capita, and lower barriers to entry across various sectors, with new regulations speeding up company registration and easing restrictions on foreign investments.

NCB said inflation in Saudi Arabia, the world’s dominant oil power, has continued its upward trend, reaching 5.5 per cent year-on-year by the end of the second quarter of 2010, lower than the 27-year peak of 11.1 per cent in July 2008, but still significantly higher than the historical inflation rate of 1-2 per cent.

It said high rents have been the dominant source of inflationary pressures, registering an annual increase of 9.4 per cent.

“We expect inflation to average around 5.2 per cent this year after recording 5.1 per cent in 2009….going forward, Saudi Arabia will see average inflation maintains the five per cent level in 2011 as well, reflecting our belief that the main price gauge will not ease substantially due to the rent component that will require medium to long-term strategic solutions,” it said.

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