Heavy public spending and high oil prices to boost Saudi economy

Heavy public spending will ally with higher oil prices and production to boost Saudi Arabia's economy by 3-5 per cent in the next three years after recording one of its slowest growth rates in 2009, a Saudi bank said yesterday.

Private investment will likely remain weak through 2010 because of tight bank lending but this will be offset by a surge in government expenditure that will lift the gross domestic product by nearly 3.7 per cent this year, above the 2005-2009 average growth, the Saudi American Bank Group (Samba) said.

The growth forecast is lower than the rate of at least four per cent projected by Saudi Finance Minister Ibrahim Al Assaf yesterday but the report expected growth to pick up to more than four per cent in the following two years.

"Private investment growth in Saudi Arabia has suffered from a global credit squeeze, and is likely to remain constrained. The banking system is liquid, but greater risk sensitivity has kept spreads on corporate financing wide. Banks are likely to remain cautious about new lending and will seek to ensure that their existing portfolios do not come under strain," Samba said in a study.

"Project finance might perform better, but banks are only likely to commit significant long term funds where the project sponsor is strong. Against this, we expect public spending to remain vigorous as the government continues to pick up the slack left by private investors. Thus, we expect investment in hydrocarbons, utilities, transport, education infrastructure and other sectors to remain robust. And with the authorities eager to limit the social impact of weaker growth, current spending should remain firm."

The report cited recent official data showing Saudi GDP, which accounts for over a fifth of the total Arab economy, grew by just 0.15 per cent in 2009.

But it stressed the rate remains better than the contraction that Samba and other institutions had anticipated through 2009.

It said the growth rate reflected a reasonable showing from the non-oil economy, where robust levels of public investment helped to offset withering private investment and keep the non-oil sector growing by three per cent.

Its figures showed the oil sector, which contributes more than a third of the kingdom's economy, contracted by just over six per cent.

In nominal terms, Saudi GDP plunged by around 20 per cent, pulled down by the 38 per cent "collapse in the value of oil output".

"We expect oil prices to track upwards in 2010 and this should allow Saudi oil output to edge up slightly. Public investment is expected to hold firm and private consumption should also tick up. Private investment should stabilise, but will remain weak," Samba said in its monthly economic report.

"These trends point to nominal GDP growth of around 13 per cent, pushing the overall nominal GDP up to nearly $416 billion (Dh1.52 trillion) in 2010. In real terms, the economy is expected to grow by around 3.7 per cent, about 0.5 per centage points higher than the 2005- 2009 five-year average."

Samba, one of the largest banks in the Gulf, said its forecast for 2011 is based on a further increase in oil prices and the beginning of a revival of private investment, which should allow public investment to "cool off a little".

It said private consumption growth would likely be supported by the stronger oil price environment, while non-oil export growth is expected to benefit from what it described as firmer global demand.

"Therefore, we expect real GDP growth of 4.1 per cent in 2011. This trend should be consolidated in 2012 as further gains in oil revenue, greater credit availability, and an improving export environment bolster private confidence and investment, boosting growth to 4.4 per cent. By end-2012 the economy should be worth around $510bn in nominal terms."

Samba's forecasts showed average WTI oil prices could rise from $62 in 2009 to around $75 and continue its climb to $85 in 2011 and $95 in 2012. The kingdom's oil output, which accounted for nearly 10 per cent of the world's crude supply in 2009, could also increase from 8.1 million barrels per day last year to 8.2 million bpd in 2010, nearly 8.5 million bpd in 2011 and 8.7 million bpd in 2012.

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