The Year Ahead for Saudi Arabia - The Economy
Khan H. Zahid

RIYADH, 15 January 2007 � As we start the year 2007 and gaze into future, what do we see? The dazzle of the Gulf economies continues to attract global attention as investment in infrastructure, industry and other projects picks up speed, thus solidifying on the ground the benefits of the accumulated oil revenues of their fourth oil boom. 

The Saudi economy will become more energetic as investment in massive new infrastructure projects, economic cities, oil and gas, petrochemicals, and other industries become reality. Although, high oil prices have been the initial stimulant, the baton of growth is shifting to the private sector, driven by reinvigorated confidence, growing domestic demand and rationalization, institutionalization and deregulation of its economic structure.

A new Saudi Arabia is being born as we speak, powered by a new-found confidence based on a number of factors � acceptance into the global community of the World Trade Organization (WTO), four years of a liquidity boom, billions of riyals of government spending in all corners of the country and spreading economic reforms.

This massive liquidity-injection has increased the country�s national income, wealth and purchasing power. The private sector will see this as a golden opportunity to set up new factories and businesses in the country to produce those goods and services. 

The beauty of the situation is that the increased income and wealth will also provide the economy with the savings needed to finance the new investments (people not only consume more but also save more). In fact, it is the job of financial intermediaries like banks to channel people�s savings into investments through loans. Riyad Bank sees this process already happening in some sectors like downstream oil, petrochemicals, construction, construction-related sectors, infrastructure projects and retail/wholesale trade.

As a result of these and other developments, we at Riyad Bank expect continued robust economic growth in the Saudi private sector for 2007, which the bank calls the �Year of the Desert Dragon.� 

Riyad Bank expects Saudi oil prices to fall by $3 per barrel and oil production to fall as OPEC cuts quotas at least one more time to defend oil prices. 

However, the risks on oil price forecasts are downside, i.e., prices are more likely to fall than rise above our forecasts. On these assumptions, the bank forecasts GDP to show a decline of 1.1 percent in nominal terms, but 4.3 percent growth in real terms in 2007. The bank also expects private sector growth to drop slightly in 2007 to 6 percent in real terms.

The bank forecasts government revenues to be SR587 billion vs. SR400 billion, and expenditures to be SR437 billion vs. budget of SR380 billion. Thus, Riyad Bank expects a budget surplus of SR151 billion vs. government estimate of SR20 billion.

Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.

Reprinted with permission of Arab News

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