Saudi Arabia: Assuring sustained growth

Saudi Arabia’s economy, already robust after posting growth of 6.8% last year, seems set for a period of sustained expansion, with state-backed investments and higher-than-projected hydrocarbons earnings contributing to the Kingdom’s strong performance.

GDP is expected to sharply increase, as the economy gains further momentum and oil prices remain over the $100 mark. According to research by Standard Chartered, the economy is expected to expand by 4.7% in 2012, well above the 2.9% projected earlier this year.

With oil output also expected to be above 9.5m barrels per day (bpd), rather than the 8.4m bpd Standard Chartered had based its initial forecasts on, Saudi Arabia will reap the benefits of increased prices and higher productions levels, the bank said.

Though demand for oil may ease in some markets, particularly in Europe should the debt crisis spread, this fall-off would be offset by an increase in demand in other regions.

Another driving force identified by the Standard Chartered report will be government spending on infrastructure and social programmes, which will likely be 7% higher in 2012 than the previous year. Investments in transport, industry, health, housing and education should serve to strengthen GDP, as the boost in the construction industry will generate more employment opportunities and increase the flow of cash into the economy.

Although GDP forecasts from a number of private agencies and the IMF, which has estimated growth at a more modest 3.6% this year, are below the government’s more optimistic estimates of 6%, recent revisions suggest that independent analysts may be coming closer to Riyadh’s way of thinking.

Higher earnings from the hydrocarbons industry should also expand the already healthy budgetary surplus, with ratings agency Fitch saying it expected the government to be able to bank a surplus of at least 12% of GDP this year, coming on top of the 14% posted for 2011.

These surpluses come despite increased state spending on social services and infrastructure, with some estimates putting outlays on new development projects at $70bn out of total planned budgetary expenditure of $184bn for 2012.

One issue that the government and the Saudi Arabian Monetary Agency (SAMA) will work on is keeping a tight rein on is inflation, as the consumer price index edged up in the first months of 2012. According to data issued by the Central Department of Statistics and Information on April 10, year-on-year inflation was 5.4% in March, with some core components of the index well above that.

The increase in rent, fuel and housing-related services over the 12-month term was 8.9%, and while below the 9.3% recorded in February, this component – along with rising food and beverage costs – could contribute to further upward pressure as demand fuelled by higher incomes and stronger spending power continues to rise.

Another challenge could come from regional instability, particularly involving relations between Iran and the West. Increasing sanctions on Iran and growing tension could push up oil prices and possibly close off waterways and ports, which would make transport and trade difficult.

However, the economy’s progress this year, with oil revenue and output at near-record levels helping to fund the government’s ambitious investment programme, should feed back into the economy as infrastructure and development projects contribute to economic diversity and increased capacity.