Domestic Demand: The Main Engine of Saudi Arabia's Growth  

(MENAFN - Arab News) JEDDAH, 26 July 2007 — Saudi Arabia's economic boom is all set to continue after four years of strong growth driven by rising oil revenues, which have stimulated massive project spending. However, domestic demand will take over as the main engine of growth for the period 2007-2010.

According to a report by Jadwa Investment of Riyadh, which was released on Tuesday, megaproject implementation and broad liberalization will push real non-oil private sector growth up to an average of nearly 8 percent with growth will be fastest in manufacturing, communication, finance and construction.

The Jadwa report expects inflation to peak this year at around 4 percent before falling gradually. "Inflation is inevitable in a rapidly growing economy such as Saudi Arabia. Given the rapid pace of economic expansion, this is low. When supply cannot keep up with demand, prices will rise. This has already happened. Annual inflation hit an 11-year high of 3.6 percent in January, compared to an average of just 0.7 percent in 2005. Bottlenecks associated with the rapid pace of growth will take some time to ease, but the near-term outlook for some of the other factors that have pushed up inflation is more promising," Brad Bourland, chief economist and head of research at Jadwa Investment, said.

He further said that "Rents will take over from food prices as the main source of inflation through 2010. Heightened competition will lower the prices of a variety of goods and services, such as telecoms, financial services and transportation."

The report said despite dollar's recent weakness Saudi Arabia will maintain the riyal's exchange rate against the US currency. Saudi Arabian Monetary Agency (SAMA) has consistently stated that it has no intention of altering the existing exchange rate arrangement and its vast stock of foreign assets gives it the ammunition to successfully defend the peg from any speculation.

Therefore, while there may be occasional speculative pressure on the peg, it will not change. As a result Saudi interest rates will continue to be broadly in line with corresponding rates in the US.

The report said since Saudi Arabia joined the World Trade Organization (WTO) it has very little direct effect on economy. This will change. As the sustainability of the current period of strong economic performance becomes evident, more and more foreign companies will enter into the Kingdom.

Manufacturing is forecast to be the fastest growing sector over the period to 2010 in Saudi Arabia. This will be led by petrochemicals, which in turn is dominated by Saudi Basic Industries Corp. (SABIC). SABIC, in conjunction with foreign and local partners, has three massive petrochemical projects — Yanbu National Petrochemical Co. (YANSAB), Eastern Petrochemical Co. (SHARQ) and Saudi Kayan Petrochemical Company (Kayan) — to come on stream during 2008 and 2009. Saudi Aramco also will enter the petrochemicals sector through the $10 billion Petro-Rabigh complex, which is likely to commence production around 2009.

The report said the investment boom would provide a supportive backdrop for transport and communications. The recent deregulation should make this sector grow by over 9 percent per annum over the period to the end of 2010.

It added that the finance is expected to be one of the most dynamic sectors over the next five years. Recent liberalization has opened the banking and insurance industries and forthcoming legislation is set to boost the nascent mortgage market.

Bourland said "Construction will be one of the main beneficiaries of this phase of the economic boom. All of the $300 billion or so of projects that have been announced have a construction element and for infrastructure and real estate developments, particularly the planned economic cities."

The Jadwa Investment report said new investment will support solid growth in electricity, gas and water. A model for private sector participation via independent water and power projects has been developed and several major projects are under way.

The report said oil market balance is likely to remain generally tight. Demand for oil will grow steadily in line with robust global economic growth, outpacing growth in supply, especially from outside OPEC. The Kingdom will have 12.5 million barrels per day (bpd) of production capacity by 2009, compared to 11.3 million bpd today, from which it produces about 8.5 million bpd, 10 percent of world oil output. While prices will average roughly where they currently are through 2010, the Kingdom's output is likely to rise somewhat, thus gradually increasing oil revenues.

Bourland said "Increases in government spending will cause the budget surplus to fall in each of the years to 2010. The elimination of the surplus should not pose any fiscal problems for several years after that, as domestic debt servicing will be at a comfortable level and a vast stock of foreign assets will provide a substantial cushion in the event of oil price weakness."

The rapid accumulation of foreign assets by Saudi Arabia and other countries in the GCC has generated much international attention. Official foreign assets have jumped from $73 billion in 2002 to $273 billion in 2006 in Saudi Arabia.

"There are risks to the healthy outlook for the Saudi economy, but nothing significant enough to alter the underlying positive developments. Much of the momentum for the years to 2010 comes from reforms that have already been enacted and can not be reversed and an investment boom that can not be stopped in its tracks," Bourland said.