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Saudi economy to grow 3.7% in 2011, credit market still weak

(Agencies) / 20 December 2010

DUBAI ó Saudi Arabia, the Middle Eastís largest economy, is expected to see gross domestic product growth of 3.7 per cent in 2011, on the back of higher public spending and improving business confidence, but ongoing weakness in the domestic credit markets still poses risks, senior bankers at Morgan Stanley said.

“Our 2011 economic outlook for Saudi Arabia is fairly positive. We expect GDP growth of 3.7 per cent in 2011, based on an expected expansion of 1.5 per cent in the oil sector and 4.6 per cent in the non-oil sectors,” Mohamed Jaber, Vice-President and Chief Economist at Morgan Stanley International, said at a recent roundtable discussion in Dubai.

“Oil production will increase only slightly next year, while domestic demand, driven by public spending and improving business confidence, is expected to strengthen,” he added.

The International Monetary Fund forecast Saudi Arabia’s GDP to expand by around 3.4 per cent in 2010 and 4.5 per cent in 2011. Saudi Arabia, which has filled its coffers with surplus income from oil exports this decade, has drawn on its reserves to fund record budgets and keep its $400 billion, five-year infrastructure development program on track.

The kingdom, the world’s top crude exporter, has benefited from oil prices above $73 a barrel for most of the year, with prices more recently hovering near the $90-a-barrel-mark. Crude futures finished higher Friday, as signs of economic improvement helped boost the case for pricier oil. Light, sweet crude for January delivery settled up 32 cents, or 0.4 per cent, at $88.02 a barrel on the New York Mercantile Exchange.

But challenges still remain for the kingdom. Apart from a sharp decline in oil prices, the main risk to the economy is continued weakness in domestic credit markets, Jaber said

“The issue is not necessarily one of domestic liquidity, which seems to be abundant, but rather one of high risk averseness by banks and of low demand for borrowing. In other words, the monetary transmission mechanism is not functioning properly,” he said.

Domestic lending in Saudi Arabia grew at more than 30 per cent annually during the boom years until 2008 but the market is unlikely to see a return to similar credit growth rates, although conditions are set to improve in 2011.

“We should see banks less reluctant to lend and credit markets starting to clear up within the coming three to four quarters, with any tangible improvements taking place in the second half of 2011,” he said.

Initial public offerings are also expected to underscore the recovery in equity markets in the Gulf Arab nation. According to a recent report by Saudi Arabia’s National Commercial Bank, or NCB, Gulf Cooperation Council issuers during the first nine months of 2010 raised a total of $1.4 billion through IPOs, a figure that still fell short of the $1.9 billion seen in the first nine months of 2009.  Saudi Arabia was the most active IPO market, accounting for over half of the total and worth around $900 million in the first nine months of the year, according to NCB.

“We see lots of IPOs coming to the market next year. I would estimate 10 to 15 IPOs in various sectors,” said Fahad Al Mubarak, chairman and managing director of Morgan Stanley Saudi Arabia.  Some large companies may also raise funds through Islamic bonds, or sukuk, or conventional bond issuance. This would include companies in the petrochemical, utilities, real-estate and infrastructure sectors, Al Mubarak added.

Saudi Arabia’s annual inflation remained unchanged from the previous month at 5.8 per cent in November, underpinned by rising housing and transport costs in the biggest Arab economy.

The global crisis has reduced inflation across the Gulf Arab region from record highs in 2008. Price pressures have been rising again in some countries but inflation is expected to stay in low single digits for now.

Analysts polled by Reuters expected average Saudi inflation of 5.3 per cent this year and 5.1 per cent in 2011, still well below a record high of 11.1 per cent in July 2008.

Monthly inflation in the world’s top oil exporter stood at 0.3 per cent in November, down from 0.5 per cent in the previous month, state news agency SPA said late on Saturday.

“Goods, services and housing are the contributing factors to inflationary pressures for the month of November ... but going forward there should be a bit of a decline,” said John Sfakianakis, chief economist at Banque Saudi Fransi. Housing costs rose 0.5 per cent month-on-month, compared to a 0.6 per cent increase in October.

Food prices, which have the largest weighting of 26 percent in the consumer price basket, rose 0.3 per cent month-on-month in November, down from a 1.6 per cent rise in the previous month. Inflation in Saudi Arabia had been on the decline since reaching an 18-month high of 6.1 per cent in August. The central bank has said it is not yet a concern. But some economists such as Monica Malik, chief economist at EFG Hermes in Dubai, expect inflation to accelerate in 2011. “For 2011, a small acceleration to 5.8. The two main drivers of inflation will be food prices, especially in the first half, and rental prices,” Maklik said.

Rising food prices are a concern among the oil producing Gulf Arab nations as several, including Saudi Arabia, rely on food imports and are influenced by imported inflation.

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