(MENAFN - Arab News) Saudi Arabia entered 2012 with positive fundamentals supporting growth: High oil prices and elevated oil output, substantial government spending, and ample banking-sector liquidity. Government spending on nonoil infrastructure projects is likely to be 7 percent higher than last year. The oil sector is likely to be slightly higher versus 2011, with most of the growth coming from the nonoil economy, according to a report by Standard Chartered.
Standard Chartered has increased its 2012 real GDP growth forecast to 4.7 percent from 2.9 percent. Its initial forecast was driven by expectations that annual oil output would be cut to 8.42 million barrels per day (mbd) in 2012 from 9.29 mbd in 2011. Given challenging regional dynamics that have pushed oil prices significantly higher this year, and commitments by Saudi Arabia to boost oil output to help ease prices, the bank now estimates that 2012 oil output will average 9.8 mbd.
Government policy is focused on infrastructure and social programs. The 2012 budget allocates 45 billion to the education sector, including 742 new schools and 40 new colleges. Health care is allocated 23.1 billion and includes 17 new hospitals, in addition to the 130 under construction. Infrastructure spending includes 9.4 billion for transport; projects include the expansion of a number of the country's airports, and the construction of close to 4,000km of roads.
In terms of projects awarded, Saudi Arabia is the region's busiest market across all key sectors, from infrastructure to power and gas. In 2011, new projects awarded in Saudi Arabia totaled 69 billion. This accounts for 55 percent of the total 124 billion of projects awarded in the six Gulf Cooperation Council (GCC) countries in 2011.
The bank estimates that Saudi Arabia's share of a total potential pipeline of 172 billion worth of projects in the GCC is around 61 billion this year. It has already awarded 8.4 billion of projects since the beginning of the year.
Saudi Arabia is now taking a leadership role in addressing high oil prices. Minister of Petroleum and Mineral Resources Ali Al-Naimi has already stated that oil prices are too high and the Kingdom stands ready to boost output by close to 25 percent if necessary, to bring prices under control.
Regional tensions have pushed oil prices significantly higher this year, with concerns that markets are likely to face supply shortages.
The 2011 budget showed record income of 296 billion (versus budgeted revenue of 144 billion), and government expenditure of 214 billion (versus 154 billion budgeted), resulting in an 82 billion surplus. It is common for Saudi Arabia to overshoot both its expenditure and its budgeted revenue. The revenue increase was driven by higher oil output - which was 9.29 mbd in 2011, versus 8.39 mbd in 2010 - and higher crude oil prices.
In 2012, Saudi Arabia expects revenue of 187.2 billion and expenditure of 184.0 billion.
Standard Chartered said Saudi Arabia's inflation hit a 14-month high of 5.4 percent in February. This was mainly driven by higher food and housing costs, which climbed 0.5 percent and 0.7 percent m/m, respectively. Unlike the UAE and Qatar, Saudi Arabia has an undersupplied housing market, where the demand dynamics of a growing population, high government spending and urbanization are pushing rental yields higher (up by 11 percent in some areas). In 2011, sale prices of single-family homes rose 15 percent in Jeddah and 9 percent in Riyadh, according to market estimates. The government has committed to build 500,000 units over the next couple of years to deal with the housing shortage. While this will ease pressure in the medium to long run, inflationary pressures from housing are unlikely to diminish this year.
Credit growth was at 11.6 percent y/y in January, driven both by the healthy position of banks and economic activity. The state is playing a key role in driving economic activity. The Ministry of Finance has pointed out that in 2011 39.5 billion worth of government projects were signed with the private sector. Given plans to push ahead with infrastructure development, and the healthy position of Saudi banks, the bank expects GDP and credit growth to remain robust, with the latter averaging 9.5 percent in 2012.