EDITOR'S NOTE:

This item of interest provides a summary of an annual report titled, "The Saudi Economy: 2004 Performance, 2005 Forecast" produced by the office of the Samba Chief Economist, Brad Bourland. The complete report can be downloaded from www.samba.com. The report is also the subject of a conversation with Mr. Bourland provided by SUSRIS today.��

The Saudi Economy enjoyed the best year of balanced performance in its history in 2004, with oil sector strength supplemented by strong growth in most segments of the non-oil private sector. In many areas -- oil sector capacity expansions, major petrochemical, power, water and refining projects; and capital markets activity -- momentum is just beginning, so we expect the robust economic performance to continue through 2005.

Oil is still the anchor of the Saudi economy, and the Kingdom earned $106 billion in oil export revenues in 2004, the highest in its history, and well above the average of $69 billion for the previous five years. This resulted in a current account surplus of $51.5 billion, and a fiscal surplus of SR 98 billion ($26.1 billion).

Underlying the strength in the oil market was exceptional global growth in demand for oil in 2004, tightness in the world's oil production capacity, and a variety of security and supply disruption concerns in major producing areas.

In this environment, Saudi Arabia increased production to make up for supply shortfalls elsewhere and benefited from firm prices. Prices for Saudi oil averaged $35 per barrel in 2004, while the government based its 2004 budget on a Samba-estimated $19 per barrel. Benchmark West Texas Intermediate (WTI) averaged $41.33 per barrel for the year.

Continued strength in the global economy in 2005, and thus in oil demand growth, as well as continued tension in major oil producing countries, such as Iraq and Russia, portend another good year for Saudi oil revenues. We believe prices for Saudi oil will average $30 per barrel for the year, and production will decline modestly from the 9 million b/d average of 2004, resulting in lower, but still strong, oil export revenues of $90 billion for Saudi Arabia in 2005. This will again be well above the conservative forecast to meet the Kingdom's 2005 budget, which we estimate was $25 per barrel, and likely result in fiscal and current account surpluses, more government debt relief, and further buildup of government reserves.

While the oil story is impressive, much of the dynamism of the 2004 Saudi economy had nothing to do with oil. The non-oil private sector grew 5.7 percent, its highest growth since 1982, the last year of the "oil boom" when the private sector grew 6.3 percent. The best performance came in telecoms, non-oil manufacturing, and construction. Fueling some of the non-oil growth were:

• Low interest rates. Borrowing costs were low for individuals and businesses. According to the Ministry of Finance, through October bank lending in Saudi Arabia had grown 26.3 percent for the year, contributing to inflationless growth in money supply (M3) of 19 percent for the year through November.
  

• Major Projects. Regulatory reform, the strong global petrochemicals market, and the transformation of the long-negotiated "gas initiative" in the summer of 2003 unlocked many megaprojects in water, power, and petrochemicals to go forward. These began to come to market in 2004 and will accelerate in 2005 and beyond.
  

• Etisalat. Telecoms liberalization begun long ago resulted in the entry this year of Etihad Etisalat of the UAE to build and operate a second GSM mobile phone network in the Kingdom. The company's near-term spending in the Kingdom will top $4 billion.
  

• Capital Markets. The successful stock market IPOs of Sahara Petrochemicals and Etisalat, combined with the start-up of the new Capital Markets Authority (CMA) helped drive the sixth year of the rally in the Saudi stock market in 2004. The market rose 85 percent in 2004, after a 76 percent gain in 2003.

Samba's "heat map" of the Saudi economy [link to complete report], a graphic we produce using 23 economic indicators to gauge the overall health of the Saudi economy, shows the economy to be the strongest and most balanced it has been in many years.

These strong conditions -- high oil revenues, stimulative fiscal policy, robust non-oil growth, low inflation, and low interest rates -- are likely to continue into 2005. While oil revenues will moderate somewhat, the momentum of the private sector will build. We forecast 2 percent real growth in the oil sector, 6 percent growth in the private sector, and 3 percent growth in government activity, resulting in overall real GDP growth in 2005 of 4.25 percent.

Also see:

Saudi Economic Performance:�
A Conversation with SAMBA Chief Economist Brad Bourland

Arab World Economies: Prosperity Amidst Political Uncertainty
Brad Bourland

Brad Bourland, CFA 

Since 1999 Brad has been the Chief Economist at Samba Financial Group, formerly Saudi American Bank, in Riyadh, where he publishes regularly on issues related to the Saudi and global economies and the world oil market. He appears frequently in the domestic and international media and is a regular public speaker. Brad is also head of country risk management for the bank, which involves managing the bank's cross-border risks. Before joining Samba, Brad spent an 18-year career as diplomat, economist, and manager with the U.S. Department of State. During the last three years of his diplomatic career he was in Riyadh as the American Embassy's First Secretary responsible for financial affairs, where he analyzed the Saudi economy for the U.S. Government and conducted financial aspects of US-Saudi relations. Brad has his BA and MA magna cum laude from the University of Utah, and is a CFA (Chartered Financial Analyst) charterholder.