Apr 5, 2011
Recent events in the Middle East have caused concern in some quarters about increased risks to Saudi Arabia's economic outlook.
While apprehensions in the region may dampen confidence in the next few months, Credit Suisse forecasts that Saudi Arabia will enjoy robust real GDP growth in the next two years.
Fuelled by surging oil prices, higher crude output and increases in government and consumer spending, Credit Suisse expects Saudi Arabia's real GDP to grow 5.7 per cent this year and 4.9 per cent next year.
After the impact of the Libyan turmoil on oil markets, crude prices surged towards US$120 a barrel, prompting Saudi Arabia to offer reassurances that it would step in to replace the loss of Libyan exports.
The rise in global oil prices and increased crude output will clearly benefit the Saudi economy. We see Saudi oil output posting large gains this year, with production rising 10.4 per cent to 9 million barrels per day (bpd).
Consequently, the oil sector will make a greater contribution to the kingdom's overall economic growth. According to our forecast, Saudi Arabia's oil GDP will grow 7.1 per cent this year and 4.6 per cent next year.
We also expect public sector spending to grow more strongly this year as authorities further boost social payments. The government's $36 billion (Dh132.22bn) social support package, announced in February, includes the first unemployment benefits, as well as investment in housing and extensions of salary increases for public sector workers.
Last month, King Abdullah announced another package of social spending, worth $133.32bn.
These packages complement the kingdom's ninth five-year development plan, a $385bn investment that targets key industrial and infrastructure projects such as the economic and industrial cities.
Moreover, development projects are aimed at drawing in private investment to fuel the expansion of non-crude activities to try to diversify away from oil, while also creating jobs to meet the needs of the kingdom's fast-growing young population.
This huge spending push by the Saudi Arabian government will further bolster activity in the non-oil sector of the economy. In our view, non-crude GDP growth will accelerate to 5.3 per cent this year and hold at nearly 5 per cent next year.
The kingdom's fiscal balance will be given a lift from surging crude prices. Based on an average Brent oil price assumption of $110 a barrel, our baseline forecast, we see government revenues leaping 47.9 per cent this year to 1.15 trillion riyals (Dh1.12tn), 53.2 per cent of GDP.
Based on our projection of an average crude output of 9 million bpd, we expect oil revenues to climb 51.5 per cent this year to 1.05tn riyals. We also expect non-oil revenues to increase by 17.7 per cent, given the pick-up in economic activity in the kingdom.
Robust revenue collections, particularly from oil, will help Saudi Arabia to offset the added burden of increased government spending from the social support packages and the continuation of the kingdom's five-year development plan.
According to our projection, government expenditure will grow 25.2 per cent this year to 811.1bn riyals (37.5 per cent of GDP).
Saudi Arabia is likely to tap its huge foreign-asset holdings to cover part of the near-term spending increases this year. Based on this, we forecast the fiscal surplus to increase to 339bn riyals. If oil prices average a higher $120 a barrel, this will result in a fiscal surplus of 410.8bn riyals.
We see Saudi Arabia's fiscal balance posting another large surplus next year of 276.8bn riyals, provided oil prices remain at $110 a barrel on average.
We see headline inflation edging up to an average annual rate of 6 per cent this year. Although annualised consumer price index inflation edged down for the third straight month in January, to 5.3 per cent, price pressures will continue, fuelled by higher prices for food and housing as well as a pickup in domestic demand.
The government's social support package is likely to add to inflation by bolstering demand. However, Saudi Arabian authorities are likely to implement subsidies and other price control measures if inflation begins to climb significantly higher.
In our view, monetary policy will remain accommodative to help the recovery gain further momentum and boost lending, with the Saudi Arabian Monetary Authority awaiting a cue from the US Federal Reserve before raising rates.
Berna Bayazitoglu is the head of macroeconomic research for emerging markets in eastern Europe, the Middle East and Africa at Credit Suisse, and Sergei Voloboev the director within the bank's emerging market economics research group
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