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Saudi economy is robust despite equity correction

After joining the World Trade Organisation (WTO), the Kingdom embarked on the mammoth projects of economic cities which will have a long-lasting impact on the macro-economic policies and on the fundamental structure of the Saudi economy. After the strong growth seen in 2003-05, the Saudi stock market underwent a correction and ended the year 2006 at 7,933.29 points, down a huge 52.53 per cent over the 2005 close of 16,712.64 points. Saudi Arabia's nominal gross domestic product (GDP) is estimated to have grown by 12.4 per cent in 2006, reaching SR1.30 trillion while real GDP is estimated to have grown by 4.2 per cent to SR799.9 billion.

The nominal GDP over the period 2002-06 grew at the CAGR of 16.5 per cent as the high prices and production levels in 2005-06 kept GDP on a high growth path. The Kingdom's nominal GDP grew by SR707b in 2002, SR804.6b in 2003, SR945b in 2004 and SR1,157b in 2005. However, in 2006, production levels on account of Opec cuts due to declining prices had its effect on the GDP growth as it recorded only 4.2 per cent real GDP growth in 2006 as compared to 6.3 per cent recorded in the previous year.

The Global report said oil sector grew by 16 per cent while the private sector grew by 7.9 per cent in nominal terms in 2006. The strong capital expenditure projects that the Saudi government has lined up are expected to add significantly to the GDP growth in the coming years. "The fiscal surplus currently witnessed is being invested in infrastructural projects which will further benefit the other sectors of the economy. This will have the effect of broad-basing the economy (diversification) along with the job creation which is much needed in the burgeoning economy," the report said. Saudi Arabia's 2007 budget projected the revenues at SR400b and expenditure at SR380b resulting in the surplus of SR20b. The revenues are 38.9 per cent lower than the year 2006 actual figures of SR655b.

It is to be noted that the actual revenues of 2006 were higher by 68 per cent than the budgeted revenues reported for 2006 indicating the conservative estimates maintained by the government while preparing the budgets. In the new budget, the government continued to pay special attention to impart quality education and improving the technical and managerial skills of its nationals. Manpower development continued to account for one of the largest allocations in the budget and accounted for 25.4 per cent of the total budgeted expenditure for 2007.

According to the budget report of 2007 released by the Ministry of Finance, the public debt is expected to drop from SR475b in 2005 to SR366b, accounting for 28 per cent of GDP. The government has been using its fiscal surplus in the last few years to settle part of its outstanding public debt. As result, the debt as per cent of GDP declined from 93.3 per cent in 2001 to the current 28 per cent. The trade balance is estimated to record a surplus of $147.6 billion in 2006, registering an increase of 17.5 per cent. The current account balance increased to $102.7b in 2006 as compared to $90b recorded in the previous year.

As a result of movement towards monetary union, the Saudi Arabian Monetary Agency (SAMA) has maintained and is likely to maintain the Saudi riyal peg to the US dollar. SAMA continued to adopt policy to support the domestic economic growth and tried to keep exchange rate stable. During the first quarter of 2006, SAMA raised the official repo rate one time by 25 basis points, from 4.75 per cent at year-end 2005 to 5.00 per cent at the end of the first quarter. In the second quarter of 2006, SAMA raised the repo rate one time by 20 basis points, from 5.00 per cent to 5.20 per cent. In early February, SAMA raised the benchmark repo rate and the reserve repo rate by 30 basis points to 5.50 per cent and five per cent respectively. Money supply (M2) registered growth of 14.9 per cent for the same period.

According to Ministry of Finance, inflation, as measured by the Consumer Price Index is estimated to have increased by 1.8 per cent in 2006 while the non-oil GDP deflator has reported a yearly increase of 2.1 per cent in 2006. Saudi Arabia's expanding economy also received a big boost as Standard & Poor's Ratings Services raised its long-term foreign currency credit rating from "A" to "A+" on the basis of its excellent financial performance. The rating agency also affirmed its long-term local currency rating at A+ and short-term sovereign credit rating at A-1. The outlook on both the foreign and local currency ratings is stable.