Global Investment House: Saudi Arabian Economy – Expected to Stand Firm

Saudi Arabia’s economic performance has been exceptional over the years. The Kingdom largely benefited from the recent high oil prices and is projecting the nominal GDP of SR1.7trillion (US$467.5bn). The real GDP growth (exceeding 3.1% in the last two years) is expected to reach 4.2% and the nominal GDP growth at 22.0% in 2008. The oil rich Kingdom remains committed to the economic diversification activity in the country. The growth outlook for the Saudi Arabian economy looks robust, with public & oil sectors investment program exceeding US$400bn over next 5years. Saudi Arabia possessing more than 20% & 10% of world’s oil & gas reserves, respectively, regarded as the economic powerhouse of Gulf Cooperation Council (GCC), will further consolidate its position in post GCC full economic union.

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The year 2008 was a historic year that witnessed the global economic landscape changing drastically from the beginning of the year to the end. Thus, largely affecting the global economic outlook. Saudi Arabia as per International Finance Corporation -World Bank 2009 Report on Ease of Doing Business was ranked at 16 among 181 countries globally, and no.1 in MENA region. Another preliminary estimate that shows an encouraging fiscal position indicated the public debt to GDP ratio to drop from 18.7% in 2007 to 13.5% in 2008 with public debt (being completely domestic) closing at SR237bn (US$63.2bn) in 2008. KSA’s inward FDI flows of US$24.3bn in 2007 recorded an annual increase of 33%, and FDI to GDP ratio of 6.4%. Non-oil sector GDP growth of 4.5%, while the oil sector GDP increased by 8.0% in 2007. Increased oil production coupled with diversification benefits is likely to accelerate real GDP growth. In the scenario of falling oil prices, while it is estimated that the average break-even oil price for GCC is about US$55/bbl, the oil price of around US$50/bbl would bring 2008-2009 budgets for Saudi Arabia into balance.

The current account balance at SR564.8bn and trade account balance at SR820.2bn in 2008, both recorded a yearly increase and also rose in terms of GDP ratio to 32.2% and 46.8%, respectively. The improved current account and trade account balances in 2008 can be attributed to high oil prices and the diversification initiatives during the year. During 2008, the total exports of goods and services are expected to grow by 31.2% reaching SR1,226bn, while the imports of goods and services are expected to rise by 12% to reach SR610.0bn.

Money supply responded favorably to the government’s actions during the year. In wake of rising inflation, the reserve requirement on total demand deposits was increased from 7% in Nov 07 to 13% till May 08. Although later in 2008 the requirement was relaxed, the move delivered the desired results. The annual M3 growth dropped from 2.8% in Aug 08 to 9.4% in Sep 08. On MoM basis, M2 growth of 2.8% in Jul 08 reduced to 0.2% in Oct 08, while M3 increase of 0.9% in Jul 08 declined to 0.4% in Oct 08. Saudi Arabia’s strong economic performance during times of high oil prices, witnessed a surge in inflation rate touching the highs of 11.1% in Jul 08. The rental component played a significant upward influence in rising inflation levels in 2008. However, SAMA closely monitoring the inflationary trends took various initiatives that coupled with the fall in commodity prices offered support in better managing the inflationary pressures. Thus, an inflation of 9.2% is estimated for 2008.

Despite the decline in oil price in the past few months, which contributes more than 85% to the government revenues, the Saudi budget presented the Kingdom’s continued commitment to focus on optimizing the use of available resources and giving priority to projects that ensure sustainable and balanced development as well as more employment opportunities and job creation. Although the Kingdom forecasts 2009 budgeted revenue of SR410bn which is lower by 8.9% in comparison to 2008 budgeted revenue of SR450bn, the budget expenditure showed an increase of 15.9% from SR410bn in 2008 to SR475bn in 2009. Thus, as per the budget estimates the Kingdom is expected to record a budget deficit of SR65bn  in 2009 as compared to a budget surplus of SR40bn in 2008. The budget estimates do reflect the repercussions of global slowdown on Saudi Arabia, the world's top oil exporter and the largest middle eastern economy, but its announcements to boost spending and the expectations to have built up significant reserves from the recent oil boom provides confidence in the Saudi economy to adequately manage the global recessionary pressures.

It is also noteworthy that Saudi Arabia like other Arab oil-producing countries has traditionally presented conservative government budget estimates based on lower oil prices. Although the economic slowdown across the world does not portray a very optimistic picture for oil prices, we believe that most likely the actual outcome for 2009 may not be a budget deficit as our preliminary forecast suggests the results exceeding the budgetary levels turning the budget deficit into a surplus.

Based on the Kingdom’s inherent strengths and our economic forecast for 2009, we are confident that although the year ahead will see a softening of the Saudi economy, the budgeted fiscal deficit has high chances of being converted into a fiscal surplus. In addition to the government’s continuing efforts and commitment, the factors like easing of inflation, low debt to GDP ratio, strong banking system and domestic consumption demand will largely facilitate the Kingdom in continuation with its robust economic growth plans. Going forward, we have estimated three different scenarios for government finances for the next fiscal year 2009.

                            Scenarios for FY 2009 Budget Outcome

                            Source: SAMA, OPEC, & Global Research

Therefore, based on our forecasts, Saudi Arabia could report a deficit of SR2.3bn in worst case scenario, while it could report fiscal surplus between the range of SR79.5bn to SR218.7bn in the most likely and best case scenarios, respectively. From these results although we derive confidence that the Kingdom will be able to fulfill its targeted economic growth objectives for 2009, the economy will definitely slow down as compared to the last year.