Lower crude prices and production cut will halve Saudi Arabia's revenue
Saudi Arabia could weather a year or two of low oil prices given its massive financial resources but its economy will suffer if crude prices remain weak beyond that period, a key bank in the Kingdom said.
Lower crude prices will combine with a sharp reduction in the Kingdom's crude output to reduce its revenues by more than 50 per cent in 2009 and sharply depress its gross domestic product (GDP), the Saudi Arabian British Bank (Saab) said in its January economic bulletin.
But the Riyadh-based Bank said lower public spending would ally with a decline in global commodity prices to more than halve Saudi Arabia's inflation rate this year after a fast growth over the past three years.
It said a sharp fall in crude prices from their peak of nearly $147 a barrel in late July would push the world's dominant oil power into an experience similar to that during 1981-1982, when oil prices collapsed and brought economic woes to the Kingdom and most other crude producers in the region.
"Certainly, the only downside risk to our forecast is the extent of the global economic recession beyond 2009 and subsequently the degree to which crude oil prices may remain depressed below $50 per barrel… if it is a simple interruption of one or two years of low oil revenues, then Saudi Arabia is very well placed to overcome the crisis," the study said.
"If oil prices go through a similar low-priced scenario to that witnessed in the slowdown of 1981-1986, then macro-economic difficulties will become far more pronounced. This could be reflected in a drop in real economic activity, depressed private-sector growth and lower government spending."
But the report noted there is a big difference between the two periods in terms of Saudi Arabia's financial capability, which it said had largely increased over the past five years because of high oil prices and the country's crude output.
"Saudi Arabia today is far better equipped to weather the low-revenue scenario due to its huge foreign assets and low government debt, both can be deployed, at different intervals, to push ahead with the expenditure programme outlined by the government and the infrastructure projects that need to be undertaken."
The report projected a sharp fall in Saudi Arabia's oil income to nearly SR525 billion (Dh525bn) in 2009, less than half its revenues in 2008. It said the steep drop in crude prices had not discouraged the Kingdom from approving a record budget.
"The 2009 budget aims to instill confidence in the economy. The budget is conservative on its expected revenues but expenditure strong," it said. Citing government data, it said budgeted expenditure totalled SR475bn for 2009, an increase of SR65bn or nearly 16 per cent over budgeted expenditure in 2008, in stark contrast to the 7.9 per cent over-budgeted expenditure raise in 2007.
It said the expansionary nature of the budget would provide a fiscal stimulus in line with the government's plan to support the economy at times when the global economy is in a recession, global financing is very tight, regional financing is difficult and local financing is reaching capacity constraints. "The years of fiscal restraint, surpluses, foreign asset accumulation and government debt reduction are all coming in handy at a time when oil export revenues will be depressed for at least 2009," the bank said. As for oil production, Saab expected the Kingdom to pump an average 7.8 million barrels per day compared with as high as nine million bpd in 2008.
The bank ruled out a reduction in Saudi Arabia's crude below seven million bpd, as implied by Opec's most recent decision.
"Hence, we realistically expect Saudi Arabia to average its oil production at around 7.8 million. The major risk to our oil production forecast is on the downside in the event of further deterioration in the global economy."
The study said high public spending and an upsurge in the domestic economy allied with a sharp rise in global commodity prices and the weakening in the dollar to push up inflation in Saudi Arabia to a record high of 9.2 per cent in 2008 compared with 4.1 per cent in 2007.
In 2009, Saudi Arabia will become a net importer of deflation which will be reflected in imported prices, the study noted.
It said lower domestic demand would bring further downward pressure in 2009, adding that real estate prices are already on a "corrective trajectory", which will also deflate domestic prices further. "We expect a year of slower performance in 2009. Consumer spending should slow down as pessimism unfolds. We anticipate oil production to fall in 2009 which will translate into lower real GDP growth," it said.
"Going forward, our preliminary forecast for 2009 is as follows: real GDP of 0.8 per cent and inflation of 4.8 per cent. Real GDP would obviously change in the event of a change in average oil output for 2009 beyond our forecast or in the event of robust private sector growth.
"Finally, forecasting in an oil-based economy is not simple. Predicting oil-price movements and production includes many unpredictable factors. Very few predicted the rise in oil prices to reach around $147 per barrel, as oil markets behaved in a very volatile manner."
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