Saudi Arabia’s economy is projected to gain pace and grow by around 4.2 per cent in 2011 as crude prices and output are heading higher and the world’s dominant oil power is lavishing funds on projects.
Forecasts by the Riyadh-based Jadwa Investments showed the non-oil sector would drive growth in 2011 while inflation will remain relatively high at around 5.3 per cent because of a surge in rents and commodity prices. Citing official data, Jadwa put real GDP growth 3.8 per cent in 2010, far above the 0.6 per cent rate achieved in 2009, when the economies of Saudi Arabia and other Gulf oil producers were jolted by the 2008 global fiscal distress.
“We forecast that economic growth in Saudi Arabia will rise to 4.2 per cent in 2011 from 3.8 per cent in 2010. Growth in both the oil and non-oil sectors will pick up. Oil production is forecast to respond to rising demand from emerging economies. High government spending will remain the main driver of the non-oil economy, supported by greater bank lending, very low interest rates and improving consumer and corporate confidence,” Jadwa said in a study.
“Non-oil growth will still be below that of the boom years around the middle of the last decade owing tougher credit conditions and a weaker global economy. Government expenditure will be vital to the economy.”
Jadwa said it expected government investment spending to edge down slightly through 2011 but added that it is the level of, rather than the growth in, this spending that is important. “Government investment spending is budgeted at SR256 billion for 2011, the equivalent of as high as 15 per cent of GDP.”
“Although this level of spending is not expected to be attained, spending around our forecast level of SR170 billion will provide a huge stimulus to the economy and ensure another very good year for government contractors.”
A breakdown showed the utilities and construction would record one of the highest rates in 2010 and would be heavily dependent on government spending.
The report said the performance of those parts of the non-oil private sector that are not direct beneficiaries of government contracts should improve. “The lack of availability of suitably priced bank credit has been the major factor holding back much of the non-oil private sector,” it said.
“Total bank credit to the private sector climbed by only six per cent in the first ten months of 2010, following average annual growth of 27 per cent between 2004 and 2008. Credit growth should pick-up in 2011.”
Jadwa attributed the recovery in bank credit to the improvement in the economy and the fact that bank provisioning for bad loans has sharply increased and is likely to exceed 100 per cent of total non-performing loans by the end of 2010.
“This should give banks greater reassurance about their own financial positions….another factor is that the low investment returns available elsewhere means the lack of lending is hitting bank profits,” the report said.
“Demand for credit from the private sector will also increase. Better bank performance should trigger an improvement in the stock market, which has an important impact on consumer confidence.”
The report noted that available data showed that the Saudi economy, the largest in the Middle East, has gained momentum through 2010. It said indicators of consumer spending, such as point of sales transactions and cash withdrawals from ATMs, point to healthy growth during the year.
Cement sales, a good gauge of construction activity, are 13 per cent higher in the first ten months of 2010 than they were in the same period of the previous year.
“Furthermore, the performance of listed companies continues to improve, with profits up by 19 per cent year-on-year in the third quarter. Finally, surveys point to an increase in new orders for local businesses. Given the strengthening fundamentals of the economy, we expect growth to accelerate in most sectors.”
A breakdown showed growth is estimated at 4.2 per cent in the private sector, 3.5 per cent in the oil sector, and five per cent in government services. Jadwa projected growth at 5.5 per cent in manufacturing, 6.5 per cent in electricity and water, 4.5 per cent in construction, nearly 4.8 per cent in wholesale and retail trade, about five per cent in transport and communication, 2.1 per cent in finance, and around one per cent in agriculture.
Turning to inflation, Jadwa expected the rate to remain relatively high, averaging around 5.3 per cent in 2011, little changed from the 5.4 per cent rate in 2010. It said rents would remain the main source of inflation while other inflationary pressures will be external, principally in the form of commodity prices.
“Domestically -driven inflationary pressures should still be fairly subdued, though there is a risk of a gradual increase in inflationary expectations. Although inflation will be well above the historical average, we do not think any new policy steps will be taken to tackle it,” the report said.
“Rents have been the main source of inflation since early-2007 and we do not expect this to change in 2011. However the growth in rental inflation has stabilised at around nine per cent over the past six months, down from a high of almost 20 per cent in mid-2008….we think rental inflation will continue to hover close to 10 per cent during 2011.”