Saudi Arabia: bucking the global trend?

Middle East, The, August-Sept, 2008 by Moin Siddiqi

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How resilient is growth in Saudi Arabia to a global downturn? The energy rich kingdom, endowed with one-fifth of the world's proven oil reserves, is in the midst of an investment-led boom that shows little evidence of being derailed by the credit crunch and ensuing slowdown in western (OECD) economies, though a faltering US dollar is adding to inflationary pressures. Economic analyst MOIN SIDDIQI examines the kingdom's unique situation.

THE FOUNDATIONS OF current expansion in the kingdom are much stronger (unlike previous boom-bust cycles) reflecting buoyant private sector activity, prudent macro-policies, liberalisation of the financial sector and foreign direct investment (FDI) regime thanks to World Trade Organisation (WTO) accession in December 2005, as well as a spending spree on infrastructural and industrial projects (including building new economic cities) across the country. A spokesperson for Saudi-based Jadwa Investments noted: "We now perceive the growth driver shifting to the private sector, marking a new phase in a period of sustained high growth in the Saudi economy."

An oil-fuelled 'hyperactivity' is having larger multiplier effects on the broader economy, with its nominal GDP [gross domestic product] swelling by three-quarters to $377bn since 2003, according to the International Monetary Fund (IMF) and is poised to grow by 23% this year. Significantly, real GDP growth (inflation-adjusted) averaged 5.5% per annum during 2003-07, compared with anaemic annual growth of 1.5% in the previous five years. John Sfakianakis, chief economist at Saudi British Bank, said: "This country had stagnated economically, it was a doom and gloom scenario for the kingdom. Within four years, it has had a complete 180-degree turnaround. The difference between Saudi Arabia and other countries in the region is that the boom is locally based, hence it is more predictable and sustainable."

Buoyed by spiralling oil prices, the 'twin surpluses' (the government budget and balance of payments) strengthened further in 2007. The current account surplus exceeded $100bn (the fourth highest after China, Japan and Germany), despite increases in imports of goods and non-factor services. The Energy Information Administration, the statistical arm of the US Energy Department, estimated 2007 Saudi oil receipts at $194bn, a 'staggering' figure, almost equal to the size of the UAE's economy. Whilst a budget surplus of SR178.5bn ($47.6bn) was equivalent to 12.8% of GDP, albeit down on 2006-07, due to rising re-current and capital expenditure in response to ballooning oil revenues.

This vast accumulation of twin surpluses after the 1990s' perennial deficits has enabled the authorities to reduce national debt and build up foreign reserves at the Saudi Arabian Monetary Agency (SAMA), the central bank. Looking ahead, the combination of robust output growth and soaring exports should see further falls in debt burden and even higher official foreign assets. The IMF estimates Saudi 2008 domestic debt at 16% of GDP (compared with 119% of GDP in 1999) with reserves reaching $413bn, but private bankers put the total official assets under management with global banks at $1 trillion.

Meanwhile, inflation has surged in recent months, fuelled by brisk domestic demand (thanks to huge liquidity), supply bottlenecks, rising food import prices and higher rents. Last April, the consumer price index (year-on-year) hit a record of 10.5%, an extraordinary rate for a country used to negligible 1% inflation or less for almost two decades. Price hikes are affecting real incomes of both Saudi nationals and expatriates, which in turn, have increased wealth disparity.

In order to mitigate the impact upon the general public the government has approved ad hoc measures that entail more subsidies for basic commodities (rice and wheat), providing a cost of living allowance (for all state employees and pensioners) worth 5% of their earnings for three years as well as stringent enforcement of consumer protection regulations. Also, a National Housing Authority is being formed to promote the construction of low-cost homes and to expedite the process of introducing a mortgage finance law.

Hamad Al Sayari, the central bank governor, urges budgetary constraints, saying: "Given the dominance of fiscal policies on the economy, it is necessary to reprioritise spending and programme it to fit the absorptive capacity of the national economy." The authorities, however, are unlikely to cutback investment and social spending, given the dire need for job creation (the unemployment rate is now 15% or higher). The SAMBA Financial Group, the second-largest Saudi bank, estimates that total spending will rise by 16% in 2008, up from 14% last year.

More recently, the Agricultural Ministry unveiled plans to invest in farming and livestock projects in overseas countries aimed at building up strategic food reserves, thus controlling future commodity prices. It involves setting up projects of about 100,000 hectares, possibly, in Egypt, Pakistan, Sudan, Turkey and Ukraine, for growing crops like corn, rice, and soybeans, wheat and alfalfa, a feed for livestock. At present, most agri-products are imported. Saudi Arabia is the largest importer of barley and one of the top-five rice importers.