Saudi Arabia: Year in Review 2011

As 2012 gets underway, Saudi Arabia can look back on 2011 as a year of solid growth, as well as anticipate a further 12 months of expansion and development, building on an already impressive economic platform as the state seeks to guarantee future growth through investments in infrastructure and human resources.

The Kingdom closed out 2011 with most economic indicators in positive territory. In part driven by higher oil prices and strong demand, Saudi Arabia’s gross GDP expanded by an estimated 6.5% for the year, second only to Qatar in the region, local media reported.

Though analysts predict that the growth rate of the Saudi economy will ease somewhat in 2012, with forecasts in the range of 3.6% to over 4%, this will still be well above the global average, and far beyond some of the country’s trading partners in Europe and North America.

While the economy grew, inflation remained steady throughout 2011, though there are suggestions that the cost of living could rise at a steeper rate in 2012. Consumer inflation stayed close to 5% through much of 2011, though it edged up to 5.3% in October before slipping back slightly in the last months of last year. However, the consumer price index could heat up in 2012 as demand spikes, fuelled by salary increases to state employees and higher public spending.

During 2011 the government unveiled a series of new investment programmes valued at more than $110bn, of which some $31bn was to be spent during the year with the remainder to be expended subsequently. The majority of this funding – coming on top of the $155bn planned for the 2011 budget – is being channelled into a wide range of infrastructure projects, particularly those aimed at boosting transport and logistics. Further funds are being directed towards schemes to provide low-cost housing, improve health and education services, expand the industrial base and strengthen the Kingdom’s utilities backbone.

With an increasing number of these large-scale projects coming off the drawing board in 2012, the country’s construction industry will be a big winner this year and beyond, though the high demands put on the building trade could push up costs as both labour and materials may be in short supply.

Despite this sharp increase in state spending, the IMF predicts that Saudi Arabia will post a fiscal surplus of 8% of GDP in 2012, coming on top of the 9.4% in 2011. This financial buffer will allow the state to be highly flexible in dealing with any unforeseen situations that might impact the economy.

Perhaps surprisingly, given the strong performance of the economy, Saudi consumers were less than positive as the year came to a close, with more than half the respondents to a recent survey saying their financial position was the same or worse off at the end of 2011 compared to 12 months before. The survey conducted by Bayt.com and YouGov also found that 57% of Saudis felt that the national economy had either worsened or remained the same during 2011.

However, on a more positive note, well over half of those surveyed believed the personal financial situation would improve in the coming year, while 50% said the national economy would pick up further in 2012. This improved consumer confidence could in part be a reflection of the increased state funding that will flow into the economy in 2012, while the lower levels of optimism for 2011 may suggest lingering negative sentiment from the global recession and a time lag in public confidence rebounding, despite better economic conditions. Whatever the case may be, it seems a growing number of Saudis have a positive outlook as they view the immediate future.

That outlook could be impacted to some degree if Europe and other regions slip back into recession, a downturn that would have the potential to cut demand for oil and push down prices. Should this happen, the Kingdom could see its energy earnings reduced in 2012, though with its strong fiscal reserves, increasing state investments and a powerful domestic economy, it is still well placed to ride out any further global economic turbulence.

This applies to the Saudi banking sector as well, according to the ratings agency Moody’s, which said in a report issued in mid-December that the Kingdom’s financial industry was well positioned to withstand any shocks from the evolving debt crisis in the eurozone. The outlook for the Saudi banking system remains stable thanks to the country's benign operating environment, the expected decline in problem loan levels, as well as Saudi banks’ supportive capital, profitability and liquidity attributes, the report said.

From all accounts, the Saudi economy will continue its forward march in 2012, with external factors the only ones likley to limit how much GDP will expand. Driven by high levels of internal investment and backed by strong fiscal reserves, Saudi Arabia should be able to further consolidate its economic and social development in the coming 12 months.