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Editor's Note:
The likelihood for a measured turnaround in the Saudi economy this year is the theme of the latest research paper from Banque Saudi Fransi, "Slow but sure: Saudi Arabia set for steady 2010 recovery." BSF Chief Economist John Sfakianakis said, "We anticipate a gradual return in risk appetite among banks in the kingdom following a contraction in credit in 2009." He noted, "At the same time, the private sector, encouraged by stimulatory public spending, is poised to make a comeback, albeit with less enthusiasm than in the years leading up to the global financial crisis."
SUSRIS is pleased to provide the introduction of this timely report for your consideration and wishes to thank Dr. Sfakianakis and his economic research and analysis team at Banque Saudi Fransi for sharing it with you.
The complete report is available
here.
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Slow but sure
Saudi Arabia set for steady 2010 recovery
- Economic growth likely to accelerate to 3.9% in 2010, with private sector growing 3.7% on steady turnaround in commercial activity
- Saudi private sector and banks poised to gradually move away from risk aversion this year, claims on private sector seen growing 8% in 2010, up from 2.1% in 2009
- Real estate shortages, public spending on infrastructure and a revival in global petrochemical demand among factors to support non-oil sectors
- Productivity has been declining in government and private sectors, which could lead to challenges for future job creation, restrain economic multipliers
Saudi Arabia�s economic recovery this year will most likely follow a gradual, steady track. Economic growth should accelerate following a stagnant and difficult year, inflation will remain at manageable but historically high levels and expansion of the private sector is set to take a turn for the better along with credit expansion at Saudi banks. The government, through a stimulatory public spending programme, will continue to lead the pick up in the economy as Saudi oil averages around $74 a barrel and low levels of government debt bolster the kingdom�s fiscal position. A higher oil price environment will enable Saudi Arabia to experience comfortable budget and current account surpluses.
While many key elements are in place to support a recovery in the Middle East�s largest economy, we are reducing slightly our 2010 economic growth forecast for the kingdom to 3.9% from 4% based on our view that improvements in business activity will be gradual and cautious. The government�s commitment to counter-cyclical fiscal expansion remains solid. Banks are likely to loosen up on their reluctance toward lending to the public and private sectors, one barrier that choked the private sector during 2009. Last year, claims on both sectors by banks contracted by almost 5%, following growth of 30% during 2008. This year, banks will have little choice than to lend more as they emerge from a period of challenging revenues and an unfavourable low interest rate environment.
It was not only banks that stifled non-oil private sector growth in 2009; Private Saudi companies themselves shelved many projects as international credit became more scarce, and businesses deleveraged and restructured. Assessing the private sector�s appetite to expand is as important as examining banks� willingness to lend. In our view, the private sector�s eagerness to invest and grow is intact, albeit at more cautious levels than 2008.
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Beyond the general risk aversion that is gradually beginning to loosen its grip, there has been a noticeable downturn in productivity in both the government and private sectors in the recent past that requires examination. Lower productivity levels could explain part of the reason why economic growth rates have lost some momentum the last four years, including in 2007 - 2008, the height of an oil price rally that supported a regional economic boom. The Saudi government last month revised lower its real GDP growth figure for 2007 to 2% (from 3.3%) and 2008 to 4.3% (from 4.45%).
Real economic growth in Saudi Arabia has not surpassed 5% since 2005. Expansion of the private sector � which was growing by more than 5% per year between 2004 - 2007 � is also down to levels that, in our view, are not strong enough to support the amount of job creation Saudi Arabia needs in order to cater to a population that accounts for two-thirds of the Gulf total, and is growing around 2% per year. The private sector expanded 2.5% in 2009 and we anticipate growth to rise to 3.7% in 2010.
State fiscal expenditures are the highest they have ever been, which has gone a long way toward thrusting the economy forward. The ability of government funds to trickle down into the economy and support the private sector is still not taking place as effectively as the government might anticipate in its effort to spur the private sector's role in the future. Small and medium-sized enterprises have not yet been major beneficiaries of the public funds pouring into the economy.
The kingdom is handing out major oil, manufacturing and petrochemical expansion contracts to big private sector players, which in itself should create a multitude of indirect business for banks, small and mid-segment contractors, building materials companies and traders. This could act as the backbone for nourishing the growth of small and medium sized establishments. A great deal can be done to revive the small and medium-sized contracting sector which has largely disappeared since the mid-1980. The size of current construction projects provides potential for a trickle down into the subcontracting segment.
Still, after rising for most of the decade, productivity among private sector enterprises is slipping. This underpins the challenge the government will face in the coming years to both boost public sector productivity and build a better platform for private sector growth to accelerate. Productivity improvements are a key catalyst for sustainable economic growth. Higher productivity increases national welfare and improves competitiveness of companies and national economies. It allows for growth without inflation and pulls together the proper backdrop for social spending. In our view, productivity is � in the long run � the only sustainable engine for job creation for the private sector.
The complete report is available
here.
Source: Banque Saudi Fransi
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