Oil output cut to depress Saudi economy but inflation will ease in 2009

A plunge in crude prices and an expected sharp output cut will depress Saudi Arabia's economy in both real and nominal terms in 2009 and this will bring relative inflation relief to the world's oil powerhouse, a Saudi bank said yesterday.

After an estimated real growth of more than five per cent in 2008, the Kingdom's gross domestic product is projected to contract by nearly 1.6 per cent while the decline in nominal terms will be far higher at 23.2 per cent, the Saudi American Bank (Samba) said in a new study on the Saudi economy.

The decline will reverse a steady five-year rise in the country's GDP per capita income, which is expected to tumble to $14,065 (Dh51,618) in 2009 after climbing to its highest level of nearly $18,854 since the end of the first oil boom in early 1980s.

"Overall, we anticipate real GDP growth in the Kingdom of just over five per cent in 2008. This is reasonably high by historical standards, but it should be emphasised that this mainly reflects buoyant economic conditions in the first half of the year. Private investment, consumption and net exports are all likely to have weakened sharply in the second half. For 2009, the Saudi economy seems likely to contract in real terms," the bank's study said.

Its figures showed Saudi Arabia's GDP, which accounts for more than a fifth of the combined Arab economy, was expected to rocket by around 29.4 per cent in nominal terms in 2008 to nearly $490.2 billion before plunging by 23.2 per cent to nearly $376.3bn in 2009. It expected the GDP to rebound by 16 per cent in 2010 because of a projected improvement in oil prices and higher production.

The expected decline in the Saudi economy next year will reverse a steady expansion recorded over the past five years because of a sharp rise in oil prices and higher output by the Kingdom in most of that period.

Oil prices are projected to average around $100 a barrel, nearly 42 per cent higher than their 2007 level of about $70.

In previous reports, Samba and other Saudi banks forecast crude prices in 2009 at nearly half the 2008 level.

Samba said its latest scenario for the Kingdom's GDP was based on much lower crude prices and a decline of more than 700,000 bpd in Saudi Arabia's crude production to an estimated average 8.5 million bpd in 2009.

It expected the drop in both output and prices to depress the country's crude export earnings by more than half from a peak of $309.8bn in 2008 to $138.7bn next year. Its forecasts showed this would turn a record current account surplus of around $178.3bn in 2008 into a deficit of nearly $17bn in 2009.

According to the study, the reversal from an overheated to a contracting economy would ally with lower global prices and other factors to ease Saudi Arabia's inflation pains after suffering from its highest inflation rate of early 11.1 per cent in July this year compared to only 4.1 per cent in 2007.

"For much of 2008 inflation was a serious and pressing issue for Saudi Arabia. From an annual average of just four per cent in 2007, 12-month consumer price growth accelerated to a peak of 11.1 per cent in July 2008. Nevertheless, price growth has since eased – while remaining high – and the outlook is for moderating inflation in 2009 and 2010," the study said.

"Some of the strains that had fuelled inflation are now unwinding, and we believe that price pressures will continue to subside (albeit gradually) over the next two years. Specific factors that are helping to alleviate inflationary pressures include a decline in global food prices, a fall in headline and core inflation in OECD countries as commodity prices ease and domestic demand weakens and lower prices of imported construction products," the study said.

The report expected inflation in Saudi Arabia, which controls more than a quarter of the world's proven oil wealth, to average 9.9 per cent in 2008 and to decline to around 8.1 and 7.0 per cent in 2009 and 2010.

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