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October 13, 2006

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The Saudi Economy at Mid-Year 2006
Office of the Chief Economist, Samba

Editor's Note 

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Today for your consideration we present the summary from Samba's report on the Saudi Economy at Mid-Year 2006.  This insightful report can be reviewed in full at www.Samba.com (follow links to the Economy Watch section).

 

Summary

The economic boom in Saudi Arabia continued to gather strength, with 2006 likely to see record oil revenues, and record trade and budget surpluses in an overall context of 20 percent growth and low inflation. Now in its fourth year, we still believe this boom is only beginning, with signs that strong oil prices and revenues will last many years, a government fiscal position that can support growth in spending for years, and megaprojects just getting underway that will carry high growth through 2010 and beyond.

Oil remains the anchor of the Saudi economy, and the Kingdom will earn a Samba-forecast $203 billion in oil export earnings this year; an all-time record and up 25 percent from the record last year of $162 billion. Even while allowing the government to provide strong fiscal stimulus to the economy, the oil revenues are not being spent as fast as they are being earned. Of the roughly $17 billion per month in oil export earnings, about $7 billion per month is accumulating as foreign assets at the central bank.

Underlying the strength in the oil market is continued exceptional global economic growth and demand for crude oil as well as oil disruption concerns in oil-producing regions of the world. Oil prices hit all-time highs during the first half of the year and ended the half at $74 per barrel (West Texas Intermediate, WTI). Our forecast, upwardly revised, is that WTI will average $68 for the year, and the average price for Saudi crude oil will be $62.50 per barrel, well above the $38 per barrel needed to meet the Saudi government budget's revenue projection. Saudi oil production is likely to average 9.4 million barrels per day (b/d) in 2006, the same as in 2005.

The local stock market, which experienced a sharp rise then decline, attracted the most attention in the first half of the year. From the top in late February to the bottom in early May, the market moved down 54 percent. From year-end 2005 to the end of June 2006, the market was down 21 percent. The downturn does, have economic implications -- a likely slowdown in retail sales, business investment, and banking sector earnings growth. These are more than offset, however, by the strength of the oil market, and we have revised upward our forecasts for GDP growth for 2006. The aspect of the stock market that continued to generate wealth is the Initial Public Offerings (IPO's). At the end of June 2006, every IPO since 2003 remained profitable, some extremely profitable, from the offering price. 

Besides oil and the stock market, the other major theme of the first half of 2006 was megaprojects. Large infrastructure investment is surging. Our assessment of major project activity shows some 37 major projects that are underway or have a high likelihood of implementation over the next several years with a total value of $283 billion. Hydrocarbons -- crude oil production, refining and petrochemicals production -- dominate, especially where private sector investment is concerned, but projects are in a wide array of industries and geographically dispersed around the Kingdom. 

Our macroeconomic forecast is for nominal GDP growth of 20 percent this year, and real GDP growth of 5.8 percent. The difference is that nominal growth captures the rising price of oil, so we find this to be a better measure of what is atually occurring. The non-oil private sector will grow 8.9 percent in real terms, the highest growth in 25 years, inflation will be under 2 percent.

The strong oil export earnings will be the main factor behind a likely current account surplus of $114 billion, the eighth surplus in a row. The trade profile of the Kingdom is healthy.

Government finances are also strong and growing stronger. Even with likely spending growth of 20 percent over 2005 levels, the government will still run a record surplus in 2006 of a Samba-forecast SR 250 billion ($67 billion). Government debt, all domestically held and riyal-denominated, will decline to about SR 380 billion ($101 billion), or 27 percent of GDP. Foreign assets at the central bank will grow to about SR 840 billion ($224 billion), enough to provide budgetary support for years to come and defend the currency's peg to the dollar. In that regard, there was speculation recently of a revaluation upward of the riyal's exchange rate against the dollar. The central bank made clear this is not going to happen anytime soon.

These strong conditions -- high oil revenues, stimulative fiscal policy, robust non-oil growth, low inflation, and surging investment in major projects -- are likely to continue well beyond 2006. The challeges to emerge will be those associated with managing high growth -- keeping inflation under control, ensuring that investment in fixed assets and government spending remain efficient, and keeping surging imports from overtaking exports. Having such challenges, however, is the envy of many economies around the world.

Produced by the office of the Chief Economist, Samba.

 

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