Fiscal stimulus policy aided Saudi economy

Published July 11th, 2011 - 01:30 GMT

Saudi Arabia was able to weather the financial crisis that swept across the majority of global economies in 2008-2009, due to the large account surplus it was able to accumulate in the five years preceding the crisis, allowing the kingdom to adjust fiscal policy and provide stimulus to counteract the effects of the global recession. 

Saudi's experience with a crash in oil prices during the 1980s provided the Saudi Arabian Monetary Authority (Sama) ample experience in dealing with recessions, which in turn proved invaluable in the latest downturn. 

As such, the countercyclical fiscal policies adopted by the country, coupled with the fiscal stimulus plan provided towards infrastructure enabled Saudi Arabia to post real GDP growth of 0.6 percent for 2009 despite a sharp drop in oil prices. 

According to the Central Department of Statistics, real GDP is estimated to have grown by 3.8 percent in 2010. With public investment worth $373 billion budgeted for 2011-2014, the Saudi economy is set to reap the benefits of the fiscal stimulus plan and record healthy growth rates in the medium term, with real GDP, says International Monetary Fund (IMF), forecast to grow at 6.5 percent in 2011. 

The public sector will remain the major force of the Saudi economy in 2011 and the medium-term, while a long-term effort to diversify the economy away from its dependence on crude oil exports is expected to be undertaken to enable a greater role for the private sector. 

Economic growth

Substantial savings that were accumulated during the 2003-2008 boom period allowed the government to play a significant role in financing new industrial and infrastructure projects, including the creation of value-added, energy intensive industries that capitalise on the kingdom's vast energy resources, and create jobs in manufacturing, tourism and other services sectors. 

Following a strong growth in 2010, the Saudi economy is expected to strengthen further in 2011, fuelled by a robust increase in non-oil GDP indicating a rebound in the private sector supported by massive capital spending by the government and a rally in oil prices amid rise in global oil demand as the world economy is gradually recovering from the financial turmoil. 

Looking ahead, the economy is poised for continued robust growth. Oil production is increasing further to compensate for lower output in the region. 

As a result, fiscal balance is likely to register strong surpluses in 2011. Reflecting the positive momentum, overall real GDP growth is projected by the IMF to reach 6.5 percent in 2011 with inflation likely to rise to about 6 percent as a result of both domestic and imported factors. 

Rising oil prices

Aided by rising oil prices, the fiscal stimulus plan initiated by the government will drive real GDP growth in 2011 while inflation is expected to rise on the back of rising food prices and rents: 

The Saudi economy is estimated to have grown at 3.8 percent in real terms during 2010 and real GDP is forecast to grow at a higher rate in 2011 to record 6.5 percent, on the back of strong oil prices and fiscal stimulus plan implemented by the government. 

As global oil supply is expected to increase in 2012, the country's growth is expected to cool slightly to register an average growth in real GDP of 4.1 percent for the period 2011-2015. 

In terms of inflation, rises in international food prices and non-oil commodities are expected to push inflation higher to record 6 percent in 2011 from 5.4 percent in 2010. Furthermore, the ongoing structural housing shortage is also a key factor contributing to relatively high rent inflation. 

The passing of the mortgage law is expected to bring down rental prices from 2012 onwards. Rising food prices will continue to be a key driver of headline inflation, accounting for almost half of the consumer price basket. 

The IMF pointed out that strong near-term outlook for the Saudi economy provides an opportunity to address longer-term priorities, high among these are providing jobs and housing for the growing young population. Key steps by the kingdom will be to continue progress in diversifying the economy, building on the positive business environment, and continuing to improve access to credit for small and medium enterprises (SMEs) as well as for housing. 

The new fiscal stimulus policy initiatives entail spending commitments over the next several years which will reduce fiscal surpluses and boost activities within the private sector. 

Fixed capital formation

Saudi Arabia's non-hydrocarbon sector will play an increasingly vital role in the economy, as the government's initiative to diversify the economy away from the hydrocarbon sector will bolster private consumption and gross fixed capital formation (GFCF). GFCF growth is expected to outperform all other expenditure components of GDP from 2011 onwards through to 2015. 

Saudi Arabia's Council of Ministers approved the budget for the financial year, projecting a deficit of 40 billion Saudi rials ($10.7 billion), with revenues coming to 540 billion Saudi rials ($144 billion) and expenditures adding up to 580 billion Saudi rials ($154.7 billion). 

With oil prices exceeding $110/barrel on the back of speculations of disruptions in oil supply due to the political unrest that is prevailing in the Mena region, a budget surplus of 94 billion Saudi rials ($25 billion) is expected to be recorded in 2011 based on an average oil price of $95/barrel. 

The budget indicates the government's decision to invest in human capital, as 26 percent of the budget is marked for education and training, while 12 percent is allocated for health and social affairs, with a goal of eliminating poverty and improving medical care in the kingdom.

Private sector 

The private sector would benefit from the budget by participating in the implementation of projects for the public sector. The budgeted expenditures for 2011 are seven percent higher than in 2010, which is lower than the average yearly increase during expansionary periods for Saudi Arabia in the past decade; therefore, it is supposed that the government expects the private sector to assume a greater role in the public-private development of the economy. 

Overall, the budget continues to support the 2010-2014 five-year development plan with the goal of long-term sustainability by investing in infrastructure, healthcare, social and economic development projects, which will diversify the economy and create the human capital needed. 

Foreign investors 

The government funded projects will raise interest amongst foreign investors, especially with regards to infrastructure upgrades. In the past decade, the kingdom emerged to become amongst the top 10 FDI recipients in the world. 

Public investments planned for 2010-2014 include maintaining Aramco's oil production capacity at 12 million barrels per day and ramping up the output of gas, refined products and petrochemicals, construction of major rail across the kingdom and investment in food abroad.

© Muscat Media Group

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