Following a strong growth in 2010, the Saudi economy is expected to strengthen further in 2011, according to a new forecast issued by KIPCO Asset Management Company (KAMCO).
In its latest economic forecast published by KAMCO on Sunday stated that the growth would be fuelled by a robust increase in non-oil GDP indicating a rebound in the private sector supported by massive capital spending by the government and a rally in oil prices amid rise in global oil demand as the world economy is gradually recovering from the financial turmoil.
Looking ahead, it said, the economy is poised for continued robust growth. Oil production is increasing further to compensate for lower output in the region. As a result, fiscal balance is likely to register strong surpluses in 2011. Reflecting the positive momentum, overall real GDP growth is projected by the IMF to reach 6.5% in 2011 with inflation likely to rise to about 6% as a result of both domestic and imported factors.
The IMF pointed out that strong near-term outlook for the Saudi economy provides an opportunity to address longer-term priorities, high among these are providing jobs and housing for the growing young population. Key steps by the Kingdom will to continue progress in diversifying the economy, building on the positive business environment, and continuing to improve access to credit for small and medium enterprises (SMEs) as well as for housing. The new fiscal stimulus policy initiatives entail spending commitments over the next several years which will reduce fiscal surpluses and boost activities within the private sector.
The Government remains committed to diversify its economy away from the hydrocarbon sector as its recently announced budget focuses spending on construction and services sectors to boost Fixed Capital Formation: Saudi Arabia’s non-hydrocarbon sector will play an increasingly vital role in the economy, as the Government’s initiative to diversify the economy away from the hydrocarbon sector will bolster private consumption and gross fixed capital formation (GFCF).
GFCF growth is expected to outperform all other expenditure components of GDP from 2011 onwards through to 2015. Saudi Arabia’s Council of Ministers approved the budget for FY-2011, projecting a deficit of $10.7 billion, with revenues coming to $144 billion and expenditures adding up to $154.7 billion.
Despite the announced deficit, it said, the government uses very conservative estimates for oil prices in its budget, and as such, will likely post a budget surplus; in order to balance the budget, an oil price of approximately $70 per barrel would be needed, while a price of $80 per barrel would result in a surplus of about $21 billion.
However, it added, with oil prices exceeding $110 per barrel on the back of speculations of disruptions in oil supply due to the political unrest that is prevailing in the MENA region, a budget surplus of $25 billion is expected to be recorded in 2011 based on an average oil price of $95 per barrel. Spending on financing new and on-going projects is set at $68.3 billion, with a large portion of it marked for the public services sector. The budget indicates the government’s decision to invest in human capital, as 26% of the budget is marked for education and training, while 12% is allocated for health and social affairs, with a goal of eliminating poverty and improving medical care in the Kingdom. Another 25% of the budget is allocated towards municipality services, transport and telecommunications, water, agriculture and infrastructure, specialized credit development institutions and government financing. As part of a longer-term spending plan, the Government plans to spend $155 billion in 2011 with a prime focus of investing in education and infrastructure.
According to report the private sector would benefit from the budget by participating in the implementation of projects for the public sector. The budgeted expenditures for 2011 are seven per cent higher than in 2010, which is lower than the average yearly increase during expansionary periods for Saudi Arabia in the past decade; therefore, it is supposed that the government expects the private sector to assume a greater role in the public-private development of the economy. However, the budget includes funds allocated to specialized credit institutions to improve the financing conditions for the private sector. Although the funds allocated to these institutions are 2.7 per cent lower than the 2010 allocation, they will support industrial projects and support human and social development, as banks in the Kingdom have only increased credit to the private sector by three per cent on year-on-year basis in 2010. Overall, the budget continues to support the 2010-2014 five-year development plan with the goal of long-term sustainability by investing in infrastructure, healthcare, social and economic development projects, which will diversify the economy and create the human capital needed.
Saudi Arabia’s attractive investment environment is promising, aided by the government’s efforts to promote the non-hydrocarbon sector. The Government funded projects will raise interest amongst foreign investors, especially with regards to infrastructure upgrades. In the past decade, the Kingdom emerged to become amongst the top 10 FDI recipients in the world. According to a recent report from the Saudi Arabia General Investment Authority (SAGIA), FDI inflows are distributed over a wide range of sectors, most important of which being real estate, construction and transportation infrastructure. During 2010, FDI dropped 33.5% to $21.6 billion, down from $36.5 billion in 2009.
Economic policy for the medium term aims at maintaining and improving the efficiency of the hydrocarbon sector, while efforts are undertaken to improve education, healthcare, transportation, and food security, along with other infrastructure projects aimed at improving the quality of life, such as the construction of four cities that will provide job opportunities and housing for the large population of youth in the country. Public investments planned for 2010-2014 include maintaining Aramco’s oil production capacity at 12 million bpd and ramping up the output of gas, refined products and petrochemicals, construction of major rail across the Kingdom and investment in food abroad.
Saudi crude oil prices have recovered steadily from their trough of about $32 per barrel in 2009 to an average of $77 per barrel in 2010. Oil prices are forecast to average around $95 per barrel in 2011, fuelled by the pickup in global oil demand and by OPEC’s supply constraint along with the geo-political tensions in the MENA region.