Saudi GDP growth to halve in 2012

Lower crude production and prices will likely depress Saudi Arabia’s GDP growth by more than half in 2012 while inflation and the current account balance in the world’s dominant oil power will recede.

Forecasts by the Riyadh-based Jadwa Investments showed GDP growth in the largest Arab economy would dive to 3.1 per cent in 2012 from 6.8 per cent in 2011 and all GDP components are expected to slow down.

The oil sector is an exclusion as it will record negative growth of 3.3 per cent in 2012 because of an expected decline in prices and the Kingdom’s output.

“Economic growth in Saudi Arabia is forecast to fall to 3.1 percent in 2012, from 6.8 percent in 2011. This sharp decline is because oil production is expected to drop after a large rise in 2011,” Jadwa said in a 15-page report on Saudi Arabia’s economic outlook for 2012.

“High government spending will continue to be the engine of the non-oil economy, supported by greater bank lending.”

The report noted that public investment spending is budgeted at a new all-time high and forecast that total government expenditure will be equivalent to 36 percent of GDP, compared to an average of 30.1 over the five years to 2008. It said this would be a huge stimulus to the economy.

“The impact of government spending across the sectors of the economy is likely to be different in 2012 than in 2011. In 2011, bonuses for public-sector employees stimulated very high growth in consumer spending, benefiting the wholesale and retail industries, importers and local producers of consumer goods,” it said.

“ With the bonus unlikely to be repeated in 2012, we expect construction companies and producers of associated goods, raw materials and services to be the main gainers from the high level of government spending.”

Jadwa said high public spending is also psychologically important for the private sector, adding that government packages announced in the first quarter of 2011 reassured businesses and consumers about the country’s commitment to support the economy and gave banks more confidence in the lending environment.

“This willingness and ability to support the economy will be important in 2012 as events outside the Kingdom are dampening sentiment and have the potential to damage the economy,” it said.

“The main economic risk is from the situation in the Eurozone. The fluid regional political situation will continue to make foreign investors wary and hit the sales of companies that export to the region.. it also brings the risk of stock market and oil price volatility.”

A breakdown showed the non-oil private sector would grow by around 4.1 per cent in 2012 compared with as high as 8.7 per cent in 2011.

Government services will swell by nearly5.2 per cent against 6.7 per cent in the previous year while growth in all other sectors will be lower.

The report showed inflation in Saudi Arabia, which controls over a quarter of the world’s oil, is expected to fall to an average of 4.4 per cent owing to an easing of price pressures from outside of the Kingdom.

“We think there will be some local inflationary pressure as a result of the high level of consumer and government spending,” it said.

It expected rental inflation to decline as more properties enter the market, but noted that it has been rising in recent months owing to higher consumer disposable income, which should mean that the drop will not be large.

In a previous study, Jadwa projected inflation in Saudi Arabia to ease slightly in 2011 despite a surge in prices in most components of the consumer index because of strong domestic demand.

The rate edged up to around 5.3 per cent in 2010 from 5.1 per cent in 2009 after recording its highest annual rate of 9.9 per cent in 2008, when all other Gulf oil producers reeled under soaring inflation rates because of the weakening dollar, high global food prices and other factors.

Jadwa forecast inflation in 2012 at 4.9 per cent, which it considered as high compared with the rates in neighbouring Gulf countries this year.

Turning to Saudi Arabia’s external fiscal position, Jadwa said lower oil export earnings would push down the country’s current account surplus by nearly $77bn to $82bn in 2012 from $159.5bn in 2011.

It projected lower crude prices and output would depress Saudi Arabia’s oil revenue to $229bn in 2012 from a record high of $302 billion in 2011.

“We expect a large fall in the current account surplus in 2012 because of lower oil export revenues. The surplus is forecast to decline to 14.9 percent of GDP from 27.6 percent of GDP in 2012,” it said.

According to the study, remittances of foreign workers in Saudi Arabia will remain the main source of outflows from the invisibles accounts.

It said the huge amount of construction work will necessitate a continued inflow in foreign workers.

“Despite measures to increase the number of nationals in the private sector, we think that the total number of foreign workers will rise and their remittances will approach $30bn in 2012.”

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