Saudi Arabia: Steady outlook

Driven in part by state spending on infrastructure, housing and social development projects, Saudi Arabia’s economy is set for a year of solid growth. Longer-term predictions, however, are factoring in the uncertain state of the global economy.

According to a report issued in mid-January by Riyadh-based Jadwa Investments, Saudi Arabia’s GDP will rise in 2012, with growth forecast to be around 3%. Though well short of the 6.8% posted in 2011, Jadwa’s GDP projection, as well as those of other analysts, still represents a solid achievement when considered in the broader financial climate, with many leading economies either in a recession or coming dangerously close to one.

At present, Saudi officials are targeting a budget surplus of $3.2bn out of the $187bn in total revenue that is expected in 2012. Jadwa, however, has forecasted a far larger budget surplus.

“We forecast a budget surplus of $24.2bn in 2012, equivalent to 4.5% of expected GDP,” the report said. “This is because we expect the oil price to be higher than that used in the budget and therefore oil revenues will exceed the budgeted total.”

Another to take a broadly positive view of the Saudi economy and the budget is Bank of America Merrill Lynch, which has described the 2012 budget as supportive of growth, with the non-oil segment in particular seen as robust. In a research note issued in early January, Jean-Michel Saliba, an economist at the bank, said the budget was expansionary and the economy would be helped by more capital expenditure, so there will be housing appropriation and capital injections to lending institutions, helping to support banking sector loan growth.

One significant point drawn out from the budget by Bank of America Merrill Lynch was the provision of SR86bn ($23bn) to be lent by Saudi-specialised credit institutions, a three-fold increase on funds made available in 2011. This higher level of liquidity will have positive implications for real estate, small and medium-sized enterprises (SMEs) and construction activity, the bank said.

With the non-oil component of the economy having expanded by 7.8% in 2011, compared to the 4.3% posted by the hydrocarbons sector, access to additional credit to maintain this growth is important, and will also help achieve the government’s goal of broadening the base of the economy.

Though the budget is aimed at further boosting social services and strengthening the non-hydrocarbons segment of the economy, oil remains the foundation on which Saudi Arabia builds its wealth. Oil exports and revenues are forecast to fall initially in 2012 as extra output to make up for shortages coming from Libya are no longer necessary. Having boosted production in 2011 to offset the shortfall in international supplies caused by the conflict in Libya, Saudi Arabia was expected to reduce output as Libyan oil returned to the market, which in turn was forecast to reduce Riyadh’s hydrocarbons revenue.

However, Riyadh has already flagged the possibility of increasing production in the event that tighter sanctions against Tehran take Iranian exports off the table. On January 16, the Kingdom’s oil minister, Ali Al Naimi, said the Kingdom could fill any gap in supplies should further sanctions be imposed on Iran. Production could be lifted from the present level of about 10m bpd to 11.8m bpd in a matter of days, while reaching full capacity of 12.5m bpd within three months, he said during an interview with CNN.

While importers may be pleased to hear Al Naimi’s assurances that his country’s excess capacity could be brought on line quickly, the increase in regional tension is a worrying development, and could push up borrowing costs and give some investors pause for thought. However, it does mean that oil prices will remain high; prices topped $100 per barrel the day following the Iranian warning. This in turn will further boost Saudi oil revenue and strengthen predictions of an expanded budget surplus.

Even if the tensions over Iran subside and many of Europe’s economies slide into recession – prompting a tailing off of oil exports – rising domestic demand and state-backed investments should keep the Saudi economy on a growth trajectory through 2012.