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Middle EastMay 4 2009

A cautionary tale

Saudi Arabia's conservative economic and political strategy has protected the country from the brunt of the credit crisis, and as King Abdullah ushers in a period of reform, increased government spending is set to diversify its economy. Writer Stephen Timewell
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A cautionary tale

Saudi Arabia, the world's largest oil exporter, has certainly been affected by the global financial crisis. But its innate conservatism, strong foreign assets of $550bn and reformist leadership have made it one of the healthiest economies in the G-20 and very well cushioned to withstand the challenges ahead. Traditionally, change in the Kingdom tends to occur at a glacial pace, but the global crisis and the sharp decline in oil prices from a high of $147 a barrel last July to less than $50 in April have not stopped the government from pursuing a record expansionary spending budget and other significant reforms recently.

 During past decades, the country's cautious approach to all aspects of social, political and economic life has met with considerable criticism, but like the tale of the tortoise and the hare, the conservative strategy implemented in the Kingdom has not only built a solid financial framework but has also avoided the excesses that have damaged many fast-paced economies, both in the Middle East and globally.

Slight slowing

 While Saudi Arabia's economy is slowing it is not facing the financial upheavals and recession taking place in the US, Europe and elsewhere. Dr John Sfakianakis, chief economist at Saudi British Bank (SABB), forecasts real gross domestic product (GDP) growth of 0.8% this year (in 2008 it was 4.2%) with the real non-oil private sector growing by 2.5%. With inflation falling fast and expected to average at 5.8% in 2009, down from 9.9% last year, and the Saudi banks all profitable in 2008, Mr Sfakianakis believes the Kingdom is the G-20's healthiest economy.

 Samba chief economist Howard Handy forecasts the overall economy will shrink by 2% in 2009, reflecting the global crisis, with the non-oil sector growing by 2%. But he also emphasises the formidable foreign asset position the country has amassed and its relatively low levels of external and domestic debt.

 External debt was equivalent to only 15% of GDP at the end of 2008 and given the huge build-up of foreign assets, net external debt is heavily negative and diminishing. Also the fiscal deficit of SR79bn ($21.1bn) planned for 2009 is very manageable at about 9% of the SR850bn that the government has deposited with the local banking system in net terms. Also, compared with the foreign assets of other Gulf states, the lower exposure to equities of the Saudi Arabian Monetary Agency (SAMA, the central bank) is thought to have limited asset losses to just 12%, compared with 40% elsewhere. In short, the financial cushions supporting the economy are very strong and the government has plenty of room for fiscal manoeuvre.

Intense change

 The economic structure is not the only aspect of Saudi life undergoing intense change. In February, King Abdullah announced his first major cabinet reshuffle since he came to the throne four years ago, changing four ministers and appointing a female deputy minister for the first time. The official explanation for the changes given by Labour minister Ghazi Al-Gosaibi were to speed up implementation of the new educational and judicial reforms introduced by the king. But the depth and significance of the changes, which included the appointment of a new chairman of the 150-member consultative Shoura Council and a new governor of SAMA, Mohammed Al-Jasser, indicate much more than a raft of new appointments and suggest an important new political direction.

 The 84-year-old monarch has clearly put his stamp on the cabinet with a new head of the judiciary, a new minister of information and the replacement of the head of the religious police; the moves indicate major changes of increased tolerance and openness. Also, the appointment of Nora Al-Fayez as deputy minister of education - the country's first woman minister - represents a major change in attitudes and an important step in strengthening education and employment opportunities fort women.

 Jamal Khashoggi, editor-in-chief of Al-Watan newspaper, says the reshuffle signals a major change in his country: "This is a huge step forward, in education, women's place in society." While the Kingdom is the only country in the world where women are not allowed to drive, women are slowly taking an increased role in the workforce; about 11% of banking employees are women, according to the latest SAMA figures.

 King Abdullah's reforms in the judiciary, education, health and the consultative Shoura Council were followed in late March by the key appointment of long-term interior minister, Prince Naif, as second deputy prime minister. This appears to signal that the 74-year-old Prince Naif will be next in line for the throne after the ailing Crown Prince Sultan, who is suffering from cancer, and clarifies concerns about the succession issue.

 Although these changes may not appear overly significant to an outsider, in the slow-moving Saudi context they represent important shifts that will facilitate further major reforms, especially in relation to women, the judiciary and the king's focus on education. Evidence of Saudi Arabia's changing tone can be seen in a new openness in other areas. The minister of Islamic affairs revealed recently that 3200 mosque preachers and imams have been removed from their posts in the past five years due to their embracement of "mistaken beliefs". And at the Gulf Film Festival for 2009, Saudi Arabia topped the list of entries with 63 films out of 212 from across the Gulf region, an interesting development for a country that has no cinemas.

Shifting outlook

 But as King Abdullah's reforms take root, what is the outlook for the Kingdom? The latest SABB Business Confidence Index of 765 companies in late February suggests the majority of businesses expect overall business and revenue growth to plateau in the following two quarters of 2009. The index, which was at 100.2 at the end of the third quarter 2008, slipped to 96.4 at the end of 2008 and to 89.2 at the end of the first quarter of 2009.

 According to SABB: "Confidence in the Saudi economy would have dipped more aggressively had it not been for the expansionary 2009 budget that is beginning to be felt as government spending is increased. This spending has a delayed effect in the real economy, but we think that it will become more widely felt in the months to come."

 The 2009 Saudi budget assumes total revenue of just SR410bn, a precipitous 63% decline on the 2008 estimate of SR1100bn. Spending has been set at SR475bn, which is some way below the SR510 actually spent in 2008, although higher than the budgeted figure for 2008. The oil price underlying the government's calculations, according to Samba, is based on a 12% reduction of crude output and an estimated average price of $48 a barrel for West Texas Intermediate (WTI) crude.

 According to Samba's Mr Handy, who expects the oil price to average $50 a barrel in 2009, there is compelling evidence to suggest government spending will continue to increase in 2009 and will most likely exceed budgeted projections. The government will clearly need to pick up the slack from both the decline in big projects and also the withdrawal of the big international banks, who have been a major funding source for the domestic project market. Recent evidence suggests that about 12% of major projects have been cancelled or put on hold as contractors seek better terms, and clearly many international banks have withdrawn to address core concerns at home.

 Nevertheless, despite significantly reduced expected oil revenues, Samba anticipates overall government spending of SR561bn, or 40% of GDP, in 2009, which represents an impressive 10% increase on 2008 expenditure. In the past few years, the Saudis have used increasing revenues to build infrastructure, including six new economic cities, and strengthen its financial framework and reserves. And the global crisis is not going to divert long-term goals. As Dr Abdulrahman Al-Hamidy, deputy governor of SAMA, explains: "The aim is to diversify the economy and create new jobs."

 Mr Al-Hamidy alludes to the government's recent SR10bn capital injection into Saudi Credit & Savings Bank as part of a social programme to provide small loans for small and medium-sized enterprises. The government has also made it clear that there will be no withdrawal of funding for the major transport projects involving airports, rail and ports.

 These huge transport projects include the $14bn North-South minerals railway, the Saudi Landbridge railway linking Riyadh to Jeddah, and the Haramain High Speed Rail project linking Jeddah, Mecca and Medina.

Spending plans

 King Abdullah's reform efforts and huge spending plans have also brought changes in other areas. The World Bank Doing Business 2009 Report ranks Saudi Arabia 16th in the world for the ease of doing business, well ahead of neighbours Qatar and the United Arab Emirates, in 37th and 46th places, respectively. Although some people may quibble about Saudi business efficiency, especially those seeking construction permits or enforcing contracts, the Kingdom is ranked best in the world for registering property and the government's objective is to be among the top 10 countries in 2010.

 Mr Al-Hamidy says this is to be achieved through the country's 10/10 programme of regulatory reforms and attractive special economic zones.

 Meanwhile, the Saudi stock exchange (Tadawul) index has plunged in the past six months, more than halving in value since the end of August 2008. The largely retail market, closely correlated to global sentiment, is undervalued according to Brad Bourland, chief economist for Jadwa Investment, who said in a mid-March report: "We think that a fair value for the market at the end of this year is 6200, implying a gain of about 50% from the current value."

 So what does 2009 hold? Unlike some other states in the Gulf and elsewhere, Saudi Arabia has the financial cushioning to maintain its ambitious reform and spending plans and to weather any global financial storms. The Kingdom, which accounts for more than 40% of nominal GDP and two-thirds of the population of the six Gulf Co-operation Council states, has a different economic model and markedly different demographics than its neighbours, auguring well for the future of the housing sector and overall growth.

 Also, with the 2009 budget based on an oil price of $37 a barrel for Saudi crude ($43 for WTI) at an output of 7.7 million barrels a day there is a lot of built-in flexibility available to weather all possibilities. Saudi Arabia's inherent conservatism provides useful protection in these difficult times.

cp/49/saudi bank results 2008.jpg

Saudi Bank Results 2008

cp/49/SAUDI ARABIAN BANKING SYSTEM - AGGREGATES.jpg

Saudi Arabian Banking System - Aggregates

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