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Saudi
Arabia: Third Quarter Economic Update
Samba - Office of the Chief Economist
Summary
In our
August 2005 (mid-year) report,
we noted that the economy is entering a boom cycle. The growth is
the best in the Kingdom's economic history. Developments in the
third quarter affirmed our view for 2005.
Up to
mid-year, revenue spikes had been behind this boom. Now we are
beginning to witness more of the spending instances of the boom as
well. Examples of growth in spending from the third quarter
include an announced salary increase for all government employees,
more clarity on Aramco's capital expenditure program, and other
announced investment projects and initiatives by King Abdullah
utilizing a portion of this year's budget surplus. These will add
more impetus to growth in the oil and non-oil sectors this year
and the years to follow. The Kingdom's accession
to WTO at the December Hong Kong ministerial meeting appears
likely. Based on third quarter developments, our revised 2005
forecasts are as follows:
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The
strong global oil market will help sustain Saudi oil prices at
an average price of $51 per barrel for 2005.
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Real
GDP for 2005 is set to climb 6.8 percent, the highest growth
level achieved in the country for the past two decades.
Nominal GDP will grow 29.8 percent, a phenomenal rise by any
economic standards, and driven by the rise in oil prices.
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The
country is strengthening its fiscal position as revenues
continue to be robust. For 2005 we expect government budgetary
revenues to total SR 551 billion, spending to total SR 343
billion, for a resulting surplus of SR 208 billion.
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The
current account will be stronger than our previous forecast of
$96 billion. We now forecast that it will reach $101 billion
at the end of 2005.
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As
the government expands its spending programs, like the recent
15 percent government salary increase, the economy will
experience some price inflation, especially in the Kingdom's
urban areas. From a previously SAMBA estimated inflation of
0.7 percent, we anticipate that by the end of 2005, inflation
will stand at 1.0 percent still at a very healthy level.
Macroeconomic
Outlook: 2005-2006
The
Saudi economy is booming and it is at its best performing period
ever. The advent of King Abdullah brought a new climate of hope
about the pace of economic reforms and several developments have
occurred early in his reign. Saudi Arabia's accession to the WTO
is now visibly close, as the final hurdle, a bilateral trade
agreement with the US, was reached in September. The King
instituted a 15 percent salary increase for government employees
as well as announcing how a portion of the excess oil revenue will
be spent. Our new estimates for 2005 are as follows:
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Oil
export revenues will hit a 22-year high of a Samba-estimated
$163 billion. Saudi Arabia will have a very healthy trade
balance and a current account surplus of $101 billion.
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Real
GDP will grow at 6.8 percent as a result of higher oil
production than in 2004, but also due to non-oil private
sector growth, which we now expect to grow at 7.9 percent in
2005 and to further pick up pace in 2006.
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Through
2005, record high global oil prices will help sustain Saudi
oil at an average price of $51 per barrel. High prices for
Saudi oil will likely be sustained through 2006.
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Fiscal
performance will be strong. We anticipate a budget surplus of
SR 208 billion, a gradual, yet continuous reduction of
government debt to SR595 billion, or 49 percent of GDP, and a
continuous build-up of central bank foreign assets, which we
forecast will stand at $141 billion at year-end 2005.
We have
upped our previous estimate of 6.5 percent real GDP growth (August
2005 mid-year report) for 2005 to 6.8 percent. We believe that
both the oil and non-oil sectors will show strong growth, the
former due to increases in oil production compared with last
year's output. The oil sector is set to grow in real terms by 7.2
percent. The non-oil private sector is set to grow by 7.9 percent.
The government will grow by 3.9 percent in 2005.
Liquidity
as measured by overall money supply (M3) has grown through August
by nearly 7 percent and we estimate it will grow by over 14
percent for the entire year. Money supply growth fell during July
and August. This tends to occur during the summer holidays. We
anticipate that money supply will pick up robustly from September
through year-end 2005.
Looking
into 2006, we anticipate the economy to continue to grow, albeit
at a lower rate compared with 2005 growth. As long as global
economic growth continues its current strong path, oil revenues
will not decline going into 2006. Due to US inflation pressures,
interest rates appear likely to continue to rise in the first
quarter of 2006 in the US and Saudi Arabia. However, higher
interest rates will not slow the Saudi economy. We expect the
Saudi economy to enjoy another impressive year:
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Oil
revenues will continue to be strong, giving another year's
boost to the budget.
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Real
GDP is expected to grow by 5.1 percent. The non-oil private
sector will grow by 8.5 percent.
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Inflation
will climb to 1.6 percent, but it will not create any
macroeconomic distortions. Higher interest rates will also
help moderate inflationary pressures.
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Government
spending will increase with prudent management and fiscal
discipline and a likely budgetary surplus.
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The
current account is expected to record a surplus of $94
billion, the eighth year in a row of surplus.
For the
complete report:
Saudi
Arabia: Third Quarter Economic Update, Samba, Oct. 22, 2005 (PDF)
Office
of the Chief Economist, Samba
Brad Bourland, CFA
Chief Economist
+966 1 477 4770 Ext 1820
brad.bourland(at symbol)samba.com
Samba
Financial Group
P.O. Box 833, Riyadh 11421
Saudi Arabia
[Check
the on-line report for disclaimers concerning this report.]
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