Ibrahim Al Assaf, Minister of Finance, on the mid-term outlook

Viewpoint: Ibrahim Al Assaf

Economic performance has been strong in the last decade and Saudi Arabia has been one of the best-performing G20 economies in recent years. Real GDP growth averaged 7% per year in 2010-12, second only to China. Following strong growth of 8.6% in 2011, spurred by higher oil output and large fiscal spending packages, the economy grew at a slower, albeit still robust, rate of 5.1% in 2012 as oil output and government spending growth moderated. The Central Department of Statistics & Information is in the process of rebasing and revising the national accounts. These revisions are expected to boost growth slightly in both 2011 and 2012. Government debt is among the lowest in the world and has declined to 3.7% of GDP.

From 2010 to 2012, the non-oil private sector grew by an average of 7.6% per year, with the manufacturing, transport, and retail and wholesale sectors all seeing double-digit growth. Increased oil production in 2011 and 2012 helped prevent supply disturbances elsewhere from having a detrimental impact on global growth. While oil output in 2013 is expected to be unchanged from 2012, the government’s commitment to spending will continue, and growth in the non-oil private sector should remain strong. Higher imports and increased workers’ remittances linked to the country’s robust growth have had a positive effect on other economies in the region and beyond.

The fiscal landscape remained strong in 2012, as revenues increased by 11.6% on the back of a 50.7% rise in 2011. Large fiscal buffers provide the fiscal space to smooth government spending over the medium term. Oil export revenues reached $332.7bn, a rise of 6.2% over the same period in 2011. The improvement in oil revenues resulted in a total 2012 fiscal surplus of $88.1bn. Total government expenditure in 2012 continued its long-term commitment to sustainable development, as project expenditures grew by 10.9%. The solid macroeconomic picture provided a healthy balance of payments profile, and the trade balance saw a surplus of $246.6bn in 2012. Higher oil exports meant the current account surplus reached a high of $164.8bn, amounting to 23.2% of 2012 GDP.

International reserves, which constitute the principal savings component of oil wealth, topped $723bn in August 2013, surpassing 2012 GDP. Foreign exchange reserves covered 58 months of merchandise imports at the end of 2012. The banking sector remains highly capitalised, profitable and liquid. The banking sector’s external assets stood at 82% of total capital and 242% of external liabilities in August 2013.

Saudi Arabia’s business environment remains highly competitive. Reforms over the past two decades have strengthened the economy, and Saudi Arabia scores well on the World Bank’s Doing Business Index and the World Economic Forum’s “Global Competitiveness Report”. Investment in developing transport networks is aimed at strengthening growth in the private sector. Investor surveys highlight particular areas of strength such as the low cost of starting a business and good market efficiency.

The July 2012 approval of the first mortgage law permits the Kingdom to regulate its real estate financing and investment, and boost its mortgage market. Since the law’s passage, loan-to-value ratios for mortgages have settled, and non-bank institutions entering the market will be licensed and supervised by the Saudi Arabian Monetary Agency. Increased lending to small and medium-sized enterprises is being supported by a strengthened credit information system and improvements in the accounting and managerial capacities of entrepreneurs. New prudential and listing rules issued by the Capital Markets Authority are aimed at deepening financial markets, while protecting investors.

The medium-term outlook for the Kingdom remains quite positive. Although many analysts are expecting an extended period of stagnant oil revenues for oil exporting countries, Saudi Arabia’s fiscal buffer should allow ample time to make any necessary fiscal retrenchment, while still nurturing the non-oil private sector, which is expected to be the fastest-growing sector.