Item of Interest
November 3, 2005

Saudi Arabia: Third Quarter Economic Update
Samba - Office of the Chief Economist

Summary

In our August 2005 (mid-year) report (LINK1), 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 (LINK) at the December Hong Kong ministerial meeting appears likely. Based on third quarter developments, our revised 2005 forecasts are as follows:

• The strong global oil market will help sustain Saudi oil prices at an average price of $51 per barrel for 2005.

• 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.

• 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.

• 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.

• 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:

• 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.

• 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.

• 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.

• 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:

• Oil revenues will continue to be strong, giving another year's boost to the budget.

• Real GDP is expected to grow by 5.1 percent. The non-oil private sector will grow by 8.5 percent.

• Inflation will climb to 1.6 percent, but it will not create any macroeconomic distortions. Higher interest rates will also help moderate inflationary pressures.

• Government spending will increase with prudent management and fiscal discipline and a likely budgetary surplus.

• The current account is expected to record a surplus of $94 billion, the eighth year in a row of surplus.

[See the complete Samba report for more details on Saudi Arabia's economy.]

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Saudi Arabia: Third Quarter Economic Update, Samba, oct. 22, 2005 (PDF)
http://www.samba.com.sa/investment/economywatch/pdf/
3rdQuarterEcononyUpdate_Eng.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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Saudi Economic Performance: A Conversation with SAMBA Chief Economist Brad Bourland - SUSRIS Interview - Feb. 27, 2005
http://www.saudi-us-relations.org/newsletter2005/
saudi-relations-interest-02-27.html
Arab World Economies: Prosperity Amidst Political Uncertainty
Brad Bourland - SUSRIS IOI - Sep. 23, 2004
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Samba Economy Watch
http://www.samba.com.sa/investment/economywatch/index.htm

The Saudi Economy at Mid-Year 2005 - Samba (PDF)
http://www.samba.com.sa/investment/economywatch/pdf/
Saudi_Economy_Aug_2005_Eng.pdf

The Saudi Economy: 2004 Performance, 2005 Forecast (PDF)
http://www.samba.com.sa/investment/economywatch/pdf/
Saudi_Economy_Feb_2005_Eng.pdf

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