Sitting on 25 per cent of the world’s proven oil reserves, Saudi Arabia has coasted though the global economic crisis relatively unscathed and analysts expect it to register a real GDP growth of over 3 per cent in 2010.
A Bank of America-Merrill Lynch report published this month forecasts Saudi’s GDP for 2010 to reach around 3.9 per cent, a massive leap from the official GDP estimates of 0.2 per cent for 2009, although lower than the 4.4 per cent GDP recorded in 2008.
Last year, the kingdom became vulnerable to the financial crisis owing to the Saad-Algosaibi debacle, which broke out in mid-2009 and caused a ripple effect across the entire GCC region. While the actual financial damage of these family-owned conglomerates’ debt default has not been officially determined, some media reports alleged that the writedowns could cost an estimated $22 billion (Dh81bn) involving around 120 regional and international banks.
“The [Algosaibi] default and the Dubai debt restructuring caused the credit crunch to reach Saudi Arabia despite the healthy balance sheets and abundant cash in the banking sector. We believe that the recovery in domestic economic activity will be relatively muted in the short-term until the credit growth recovers, possibly later in [the second half of 2010],” the report said.
Despite this, the bank says Saudi presents the strongest long-term secular growth story in the Gulf region, which can be attributed to the country’s petrodollar-flushed savings, huge demographics and the need for government spending on infrastructure projects.
Dubai-based investment bank Shuaa Capital has likewise been optimistic about the kingdom’s performance during this tough economic climate. In its Saudi Vision 2010 Report, Shuaa analysts said they anticipate a 3.2 per cent real GDP growth this year for the Gulf region’s largest economy.
“Saudi Arabia’s economy has proved somewhat resilient to the shocks of 2009, avoiding recession and managing to sustain strong external balances even in the face of lower oil prices and production,” the report said.
It also noted that the government’s “prudent management of oil revenues over the years” has helped it finance projects without the need to seek debt market support.
The Shuaa report admitted, however, that while the near-term outlook may be positive, Saudi still faces the major challenge of diverting its dependency on petroleum-based revenues in order to sustain its economic growth over the long term.
Government spending to fuel economic growth
Both studies believe that the current economic slowdown will not hamper the Saudi government’s ardent desire to push through with their expansion plans, particularly with regard to infrastructure development.
Saudi Arabia is seen allotting the highest budget for infrastructure in the entire GCC. According to Shuaa, expenditure could reach around 600 billion riyals ($160bn; Dh587bn) in 2010, rising by 9.1 per cent from the budget allocation for 2009.
Shuaa also mentioned that the country’s budget surplus will likely reach nearly 4 per cent of its GDP. This estimate is based on an oil price assumption of $70 (Dh258) per barrel.
Likewise the kingdom’s population, which according to the CIA World Factbook stood at over 28 million as of July 2009, holds huge potential to boost spending on retail and construction projects.
“Despite a slowdown, the non-oil economy grew 3.6 per cent in 2009, offsetting the sharp decline in oil production. The healthy consumer sector and the construction activity supported by generous budget spending have been the main drivers,” Bank of America-Merrill Lynch said in its report.
The private sector’s involvement in the country’s economic activities will also play a significant part in securing substantial growth this year. Unfortunately, the Saad-Algosaibi debt woes have already cast its shadow on the domestic banking sector, making credit lending more difficult than ever, especially for small-and-medium businesses.
While financial analysts remain optimistic about the possibility of credit facilities being made available once the dust has settled, they are likewise realistic that prolonged tight lending could significantly hurt fiscal results.
“If banks continue to remain risk averse to lending domestically, this would pose a downside risk to our GDP growth forecast for this year,” says Shuaa.
Bank of America-Merrill Lynch believes that loan growth recovery will only be gradual at 7 per cent in 2010, but will post a double-digit growth of 14 per cent by 2011.
Challenges ahead amid need for fiscal reforms
While it may have most of the healthy indicators to a positive economic outlook, Saudi Arabia has been observed to take slow strides in implementing fiscal policy reforms.
It was only recently when the Saudi bourse Tadawul announced that it will start offering exchange-traded funds (ETFs), which will be made open to foreign investors in a bid to attract foreign involvement in its financial market. Trading for this facility will begin on March 28.
Bank of America-Merrill Lynch said Saudi’s move to open up the financial market to foreigners, in addition to introducing a mortgage law and developing economic cities are main drivers of transformation that are still in “baby steps.”
Meanwhile, Shuaa reported that the while kingdom’s $400bn foreign assets may allow it to support GDP growth in the coming years, this may not be the best strategy.
Population growth in the country over the past 20 years has resulted to a shortage in housing, increased demand for utilities and education- and health-related services. Unemployment has slightly rose as well because of the lack of jobs for new entrants.
Because of this, Shuaa believes that “Saudi Arabia’s reliance on the oil sector needs to be reduced to lower its vulnerability to commodity price shocks and to tackle high unemployment.”
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