MENAFN - Arab News
Saudi- High spending to remain engine of Kingdom's nonoil trade
(MENAFN - Arab News) The Riyadh-based Jadwa Investment expects another year of reasonable economic performance for Saudi Arabia in 2012. It said lower oil production will cause total real economic growth to slow, and combined with lower oil prices, will reduce the budget and current account surpluses. High government spending will remain the engine of the nonoil economy.
The Kingdom's economic growth to fall to 3.1 percent in 2012, from 6.8 percent in 2011, the Jadwa report said. This sharp decline is because oil production is forecast to drop after a large rise in 2011. Growth in the nonoil economy will be 4.7 percent. Government spending will be supported by greater bank lending and high consumer spending. Construction, the main beneficiary of government spending, should be the fastest growing sector.
Budgeted government spending for 2012 is well below the actual level for 2011, but this latter figure was distorted by one-time payments. Investment is budgeted at a record high and total spending will provide an important stimulus to the economy. "We expect another budget surplus in 2012. The government will draw down its foreign assets, which stood at around 520 billion at the end of October, to finance its expenditure plans in the event of any shortfall in revenues," Jadwa said in its report.
Inflation is forecast to moderate to an annual average of 4.4 percent in 2012. Negligible external price pressures, due to lower commodity prices, a strong dollar and subdued inflation in trading partners, will underpin the decline. This will be supported by lower rental inflation, as more properties enter the market, though the amount of new supply, and therefore its impact on inflation, is not clear. These factors should offset the local inflationary pressures caused by the high level of consumer and government spending. Interest rates will remain exceptionally low. This will bolster the economy, though it will hinder the government should it need to tackle inflation. "We do not expect any change to the riyal's peg to the dollar," Jadwa said.
The main risks to forecast stem from the external environment. There is a danger that the debt crisis in the euro zone could spiral out of control, causing renewed global recession and a shock to the global financial sector similar to that of late 2008. The implications for the Kingdom would be serious, but not disastrous, given the government's willingness and ability to honor its spending commitments.
Oil prices are forecast to fall in 2012 owing to a weakening of the global economy. Saudi export crude will average 92 per barrel (equivalent to 95 per barrel for Brent and 86 per barrel for WTI). With Libyan production likely to return to very close to pre-conflict levels by the end of 2012 and output from Iraq steadily rising, Saudi oil production is expected to fall by 4.4 percent to 8.8 million barrels per day, the Jadwa report said.
Global oil demand is expected to rise in 2012 as a result of continued solid growth in emerging markets, primarily Asia. According to the International Energy Agency (IEA), Asia will be the source of over 60 percent of global oil demand growth in 2012. Demand growth from elsewhere will be fairly sluggish as economic growth slows. A deep recession in Europe would have a significant impact on oil demand; the fall in demand in Europe in 2009 was greater than the growth in demand from all emerging markets that year.
Oil supply should rebound after various disruptions in 2011. The largest of these was the civil conflict in Libya, which took about 1.5 million barrels per day off global markets for around seven months. Libyan production has reportedly already reached 1 million barrels per day and should be close to its pre-conflict level by the end of 2012. Iraqi production is also set to continue to rise. In addition, the IEA projects non-OPEC supply to rise by 1 million barrels per day, the highest level since 2002 (though these projections tend to be overoptimistic).
Replenishment of oil stocks should give some support to prices. Oil stocks are at their lowest level, in terms of days of forward demand, since the end of 2008. Total OECD stocks have spent four consecutive months below their five-year average for the first time since 2004.
Geopolitical risks and financial flows also need to be considered when forecasting prices. The turbulence in the Middle East and North Africa added a risk premium to prices in 2011 and this will remain in place in 2012 as uncertainty is likely to linger, the report added.
Financial flows have also influenced oil prices in recent years, as is clear from the close relationship between oil prices and stock markets and other proxies for sentiment about the global economy. In the tough global environment expected for 2012, gains in global stock markets are likely to be modest, at best, meaning they will not exert much pressure on the oil price.
Economic growth in Saudi Arabia is forecast to fall to 3.1 percent in 2012, from 6.8 percent in 2011. This sharp decline is because oil production is expected to drop after a large rise in 2011. High government spending will continue to be the engine of the nonoil economy, supported by greater bank lending. According to Jadwa, construction, the main beneficiary of government spending, to be the fastest growing sector. Concern about global economic and regional political risks will weigh on the private sector.
Government spending will remain central to the economy. Investment spending is budgeted at a new all time high and that total government expenditure will be equivalent to 36 percent of GDP, compared to an average of 30.1 over the five years to 2008. This will be a huge stimulus to the economy. The impact of government spending across the sectors of the economy is likely to be different in 2012 than in 2011. In 2011, bonuses for public-sector employees stimulated very high growth in consumer spending, benefiting the wholesale and retail industries, importers and local producers of consumer goods. With the bonus unlikely to be repeated in 2012, construction companies and producers of associated goods, raw materials and services to be the main gainers from the high level of government spending.
High spending is also psychologically important for the private sector. The government spending packages announced in the first quarter of 2011 reassured businesses and consumers about the government's commitment to support the economy and gave banks more confidence in the lending environment. This willingness and ability to support the economy will be important in 2012 as events outside the Kingdom are dampening sentiment and have the potential to damage the economy. The main economic risk is from the situation in the euro zone. The fluid regional political situation will continue to make foreign investors wary and hit the sales of companies that export to the region; it also brings the risk of stock market and oil price volatility.
The Jadwa report said 2012 to be the fourth consecutive year that the economy is driven by government spending. Nonoil private sector growth is forecast at 4.7 percent, still well below the boom years of the mid-2000s, when a dynamic nonoil private sector grew at an average of almost 6 percent per year.
Aside from government expenditure, the revival in bank lending growth will be an important supportive factor for the private sector.
Although nonoil economic growth to pick up, the trend varies across the key sectors of the economy. Our expectations for growth in the main sectors are as follows:
Oil is by far the largest sector of the economy, accounting for around 25 percent in real terms, and the decline in oil production in 2012 is the main reason that economic growth will slow.
Manufacturing growth is likely to slow in 2012. Up to the third quarter of 2011 the worsening global economy had not caused any impact on the sales volumes of Kingdom's petrochemical producers, but volumes will be hit as the slowdown extends into 2012.
Electricity, gas and water will remain one of the quickest growing parts of the economy. Sectoral growth has averaged 6.4 percent in the past decade and should be faster in 2012 with new housing, commercial and office space coming on stream in addition to rising industrial demand. No major additions to capacity are set to come on stream in 2012, though there will be increases at regional facilities in Qassim, Tabuk and Yanbu, the Jadwa report said.
Construction is forecast to be the fastest growing sector in 2012. To date, there has been relatively little physical progress in the government's plan to build 500,000 new housing units, announced in March 2011. Growth in cement sales and imports of construction materials in 2011 was in line with the historical trend.
In 2012 there should be much more construction activity. In addition, there are a vast amount of private-sector projects, infrastructure development and other government schemes that have an element of construction. According to Middle East Economic Digest, there are around 660 billion of projects either planned or under way in the Kingdom, a total that does not include the bulk of the government's house-building program.
The Jadwa report said that growth for the telecoms and transport sector will slow. This is because the stimulus resulting from the surge in mobile phone use in recent years will fade. Mobile phone penetration hit 198 percent (1.98 phones per person) at the end of September 2011, a level from which there seems limited room for further growth. Mobile subscriptions were up by 8.7 percent over the first nine months of 2011, compared to an annual average growth of over 30 percent in the previous five years. Broadband and mobile applications will remain an important source of growth.
Growth in the finance sector will pick up, though it is likely to remain fairly sluggish.
Inflation is expected to fall to an average of 4.4 percent owing to an easing of price pressures from outside of the Kingdom. According to Jadwa there will be some local inflationary pressure as a result of the high level of consumer and government spending. Rental inflation should decline as more properties enter the market, but it has been rising in recent months owing to higher consumer disposable income, which should mean that the drop will not be large.
International conditions provide a benign backdrop to inflation in the Kingdom. Moves in global food prices have been a leading source of inflation in the past few years, but for 2012 these should be more favorable.
Domestic policies should also moderate food price inflation.
The commodity that is currently having the greatest impact on inflation in the Kingdom is gold.
Rents have been the main source of inflation in the Kingdom for most of the past five years.
Inflationary pressures elsewhere in the economy are stronger. High consumer spending, double-digit money supply growth, rising bank lending and exceptionally low interest rates will lift inflation in areas such as home furniture, education and entertainment, transport and telecoms and medical care. However this comes from a low base (inflation for these four sectors averaged 2.1 percent in November). "Even if domestically generated inflation is above our forecast we do not see headline inflation getting to anywhere near the highs of 2008, as back then very strong domestic demand was accompanied by rapidly rising commodity prices, a falling dollar and global inflation much higher than today," Jadwa said in its report.
According to Jadwa, a large fall in the current account surplus in 2012 was because of lower oil export revenues. The surplus is forecast to decline to 14.9 percent of GDP from 27.6 percent of GDP in 2012. In dollar terms the surplus is expected to almost halve to 82.2 billion from the all-time high of 159.5 billion recorded in 2011. Imports should grow faster than nonoil exports. The invisibles balance, which consists of flows of remittances, incomes and payments and receipts for services, will stay in a large deficit.
Oil revenues constitute between 85 and 90 percent of total export revenue, so the decline in oil production and prices for 2012 will cause a substantial fall in total exports, though they are still forecast to be the second highest on record. Nonoil exports should rise modestly. Nonoil exports hit an all-time high of 4 billion in October, with petrochemicals accounting for one-third of the total.
Import growth is expected to pick up as implementation of the housing construction and other government infrastructure programs lifts the demand for construction raw materials and machinery. High consumer spending will boost imports of household goods, vehicles and electronics. However, Jadwa expects the trade surplus to fall to 162 billion in 2012 from 244 billion in 2011.
Remittances of foreign workers will remain the main source of outflows from the invisibles accounts. Despite measures to increase the number of nationals in the private sector, the total number of foreign workers will rise and their remittances will approach 30 billion in 2012.
High government spending will continue to underpin the economy. The 2012 budget projects a surplus of SR12 billion, based on revenues of SR702 billion and expenditure of SR690 billion. This is the first year since 2008 that the Kingdom has budgeted for a surplus.
Interest rates will remain exceptionally low in 2012. This will support the economy, though it will hinder the government should it need to
tackle inflation. As a result of the exchange rate peg and the open capital account, interest rates in the Kingdom need to shadow those
in the US, the Jadwa report said.
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