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Saudi Arabia set to record strong performance in '06
Khaleej Times - 21/12/2006

(MENAFN - Khaleej Times) JEDDAH — Saudi Arabia is set to realise another strong economic performance in 2006. The economy witnessed buoyant growth, with nominal GDP expanding by 20.3 per cent year on year in (Hijra) H1 2006 and a real GDP growth of 6 for the year as a whole is forecast.


Much of the buoyant performance in H1 came on the back of the 36.8 per cent year on year jump in oil exports, although non-oil exports also performed solidly, increasing by 11.6 per cent year on year. Despite this robust economic expansion, inflation remains relatively low (2.2 per cent year on year in August), albeit increasing from a low average of 0.7 per cent in 2005.

The high oil price will also result in the fiscal and current account surpluses reaching record levels in 2006.

Part of the fiscal surplus has been used to continue to reduce government debt levels and it is estimated that total debt will fall below to 20 per cent of GDP by the end-of 2006. This is compared to a peak of 119 per cent of GDP in 1999.

Meanwhile, reserves have also been increasing, although much of the Kingdom's oil income has been directed towards foreign assets, rather than official reserves. Net foreign assets of the Saudi Arabian Monetary Agency (SAMA) have increased sharply, reaching SR756.9b.in Aug, up 32.1per cent from end-2005.

The high oil price and increased government spending has mitigated any wider impact of the fall in the stock market on the economy, although many individual retail investors have been hard hit. After steep falls in Q1, the Tadawul All Share Index (TASI) has seen further corrections from end-October. The index had fallen by 52.1 per cent year to date and by 17.7 per cent from end-October. The main area likely to have been negatively affected is consumer spending, especially for luxury goods. However, along with the higher spending, the government has taken measures to soften the blow; including reducing gasoline and diesel prices by around 30 per cent...

The government has also announced measures to support the stock market. This includes indicating in August that investment institutions and pension funds from other GCC countries will be able trade directly on the TASI. Furthermore, in November, the Capital Market Authority (CMA) issued long-awaited corporate governance guidelines. However, given the guidelines are voluntary; their impact is likely to be limited.

A number of IPOs are planned, which will help to increase the number of companies listed on the TASI. Demand for IPOs has remained relatively strong, despite the weakness in the stock market. Overall, these measures are positive for the development of the stock market, but are unlikely to restore confidence in the short term.

Along with measures to support the stock market, Saudi Arabia has forged ahead with its investment and reform programme to boost the country's economic potential and create new jobs. Throughout the year, the government has continued to announce a raft of new investment projects in a wide variety of areas, including increasing oil and gas, refining, petrochemicals, infrastructure, mining and steel.

The need for upgrading infrastructure was highlighted by the electricity and water shortages over the summer. Total planned investment over the next 5 to 6 years is estimated to be over SR 750b, with a large proportion of investment in the non-oil sector coming from the private sector.

This higher level of investment, along with current spending from the government, will be important in supporting real GDP growth in 2007. This is especially the case given that net exports are forecast to detract from real GDP growth, with oil production expected to fall, along with oil prices.

Meanwhile, the import bill is forecast to increase with the higher investment level. As a result, the real GDP growth in 2007 will slow to an estimated 5 per cent.

On the reform front, the plans for Saudi Arabian Airlines have been redefined and bids have already been solicited for the catering arm of the airline. The government has also indicated it plans to reorganise the postal service and sell 49 per cent of some operations. The government also has announced the expansion of King Abdullah Economic City, the development of four new economic cities in different areas and tax breaks for foreign firms investing in underdeveloped regions.