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Middle EastApril 2 2012

Saudi Arabia's economy goes from strength to strength

By identifying potential weaknesses and fixing them – diversifying a previously oil-reliant economy and encouraging growth in the private sector – Saudi Arabia has managed to sustain a growing economy, even through times of economic and political turmoil.
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Saudi Arabia's economy goes from strength to strength

Unlike many of its G-20 peers, Saudi Arabia had a prosperous year in 2011, and in 2012 its fiscal policy remains expansionary, with macroeconomic indicators showing strong growth and hinting at even better times ahead. While the political climate of much of the rest of the Middle East and north Africa is far from healthy – with serious concerns about the situations in Syria and Iran in particular – the overall economic picture in Saudi Arabia is remarkably robust, with gross domestic product (GDP) growth in excess of 6% and private sector growth rising above 8%.

Saudi Arabia managed to weather the 2008 global financial crisis relatively well, and with both the price and production levels of oil increasing, the outlook for the country is positive and confidence is high and building.

As the National Commercial Bank's (NCB) chief economist, Said Al-Shaikh, says in his budget report: “2011 was a historic year for the Saudi economy, with real GDP registering 6.8% annual growth, driven by the non-oil sector that grew by 7.8%, year on year. More importantly, the non-oil private sector increased by 8.3% year on year, an unprecedented pace for almost all sectors, notably manufacturing and construction.”

Expanding vision

While across Europe many countries are introducing austerity measures to combat the eurozone crisis, Saudi Arabia’s fiscal policy remains expansionary. The fiscal balance remained in surplus in 2011, edging to SR306bn ($81.6bn), approximately 14% of GDP, on the back of higher oil prices and output. Mr Al-Shaikh says: “It is worth noting that SR250bn of the 2011 surplus will be deposited at the Saudi Arabian Monetary Agency [SAMA] to finance the 500,000 housing units announced in March 2011."

Although Saudi Arabia's 2012 budget, announced at the end of 2011, expected a lower surplus of SR12bn – based on estimated revenues of SR702bn and expenditures of SR690bn – other forecasts project significantly different amounts for the 2012 surplus. NCB projects a surplus of SR150bn, based on an average Arabian light oil price of $95 a barrel for 2012, while Jadwa Investment’s head of research Paul Gamble forecasts a budget surplus of SR158bn, equivalent to 7.4% of the country's GDP.

SAMA vice-governor Abdulrahman Al-Hamidy stresses that the economy has been doing “extremely well”, emphasising the focus on small and medium-sized enterprises (SMEs), the growth of the private sector and the importance being placed on diversifying the economy and exploiting new areas such as minerals – including phosphate and bauxite – with major new projects under way in these alternative sectors. 

Saudi Arabia key data

Priorities right

A number of government initiatives announced in 2011 are expected to have an important longer-term impact on the Saudi Arabian economy, especially in areas such as education and housing. These initiatives, which are only just beginning to percolate through the economy, have been a cause of the rising confidence in the economy, strong growth and also a revival of the country's stock market, and will have a continuing impact on spending in the medium term.According to the September 2011 IMF Article IV Consultation regarding Saudi Arabia: “Key priorities are to: contain near-term inflationary pressures; ensure medium-term fiscal sustainability; create job opportunities for nationals while maintaining competitiveness; further develop capital markets; and improve access to housing finance."

The IMF notes that royal decrees issued on February 23, 2011, and March 18, 2011, introduced new initiatives to tackle social issues that will have substantial short- and medium-term expenditure implications. The packages include public sector wage increases, expansion in public employment, unemployment benefits and measures to improve access to housing. The packages are estimated to be worth a combined SR400bn or $110bn (19% of 2011 GDP). Of this, an estimated SR117bn (5.5% of GDP) is likely to have been spent in 2011. Capital expenditures, particularly related to housing, are expected to pick up slowly and spread over several years.

Compared to its G-20 peers and other countries in the region, Saudi Arabia is performing well on these counts, and markets are beginning to notice the country’s strong fundamentals. While an increase in rents lifted year-on-year inflation to 5.4% in February 2012 – the highest level since December 2010 – concerns on this front are relatively muted and analysts are pleased by the strong domestic demand. SAMA’s Mr Al-Hamidy not only emphasises the country's growth in spending on infrastructure and other projects, and its more than 120,000 students studying abroad, but also its low debt profile and high foreign assets – the fourth largest in the world.

In 2011, Saudi Arabia’s debt-to-GDP ratio fell to a stunningly low level of 6.3%, with foreign assets at $550bn and still growing. While Saudis are not over-confident about these figures, it seems clear that their debt ratio is sustainable at that low level and may go even lower in years to come with current account and budget surpluses looking sustainable and the government achieving some success in diversifying its economy.

Good ratings

With the low debt-to-GDP ratio in Saudi Arabia, financial players are increasingly more comfortable with the country's macro environment and this is bringing further positive responses. On March 13, 2012, rating agency Moody’s reiterated its previous rating of the government of Saudi Arabia, noting: “Saudi Arabia’s Aa3 government ratings are supported by ‘very high’ government financial strength and ‘high’ economic strength.

"Windfall oil revenues in the past several years have generated very large fiscal surpluses, allowing the government to build a sizeable asset cushion and reduce sharply its debt ratios to levels much lower than its rating peers. The [country's] dominant position in the Organisation of the Petroleum Exporting Countries with the greatest amount of spare capacity – more than all other members combined – makes it geopolitically important for the US and other industrialised nations. The smooth leadership succession in July 2005 allayed previous concerns about political stability.”

In other developments, non-oil exports in Saudi Arabia hit an all-time high in December 2011, with exports of both petrochemicals and plastics exceeding SR5bn for the first time. Non-oil exports have been boosted by the commencement of shipments from the Saudi Arabian Mining Company's Ma’aden phosphate facility.

Like new bauxite exports, phosphate exports are expected to grow steadily over time. Such minerals, along with gold, are expected to add a third leg to the country’s export potential; the first leg being oil and gas, the second being the expanding petrochemicals sector and the third being the expansion in minerals, especially through Ma’aden, which is seeing huge growth in production and sales of gold, zinc, bauxite, phosphate and aluminium, as well as huge transport infrastructure projects to bring these minerals to market.

Saudi Arabia bank lending rates

Taking stock

The Saudi stock market has also reflected the strong growth characteristics seen elsewhere in the country. In 2011, a total of 48.54 billion shares were traded on the exchange, up 47% compared with 2010, with the aggregate value of shares traded increasing from SR759.2bn in 2010 to SR1098.8bn in 2011, up a significant 45%.

According to Jadwa Investment, the Tadawul All Share Index (TASI), although it dropped by 3.07% in 2011, has rebounded strongly in 2012, retaining a strong upward momentum during February and early March amid much higher volumes. The TASI rose 9.8% in February 2012 and was up 14.6% on March 4, 2012, with a record 14 consecutive positive trading days.

A number of global, regional and local factors have combined to intensify a revival in sentiment among local and foreign investors. With potential for foreigners to enter the market in earnest in 2012, foreign interest is surging along with a revival of domestic sentiment.

Islamic influence

Another positive market indicator has been the growth of sukuk issuance in the country. Until 2012, sukuk issuance in Saudi Arabia had been modest at best and somewhat overshadowed by activity in other countries such as Malaysia. However, in January 2012, Saudi Arabia’s General Authority for Civil Aviation (GACA) launched a debut sukuk offering worth SR15bn, which was three times oversubscribed and seen by bankers as a landmark deal.

The Islamic financing, which is fully guaranteed by the Saudi Arabian ministry of finance, and is the first in a series of sukuk from the authority to help fund the SR27.1bn development of King Abdulaziz International Airport in Jeddah, is viewed not only as a major boost to sukuk financing in the country but also as a key benchmark for pricing on major infrastructure financing.

Bernd van Linder, managing director of Saudi Hollandi Bank, describes the GACA sukuk as: “A landmark deal that provides benchmark pricing, and you can expect more of these to come. The government will not need to issue debt but this issue is important for projects and infrastructure financing.”

The highly oversubscribed GACA deal is the largest single tranche sukuk in the world to date and David Dew, managing director of Saudi British Bank, says: “Sukuk issuance in Saudi Arabia is on the rise. The outlook is positive ensuring that the prospects for sukuk issuance in 2012 will be strong. There is healthy underlying demand from issuers and also investors are looking for quality investment opportunities, so it seems both sides have come together.”

In a March 2011 report, HSBC forecast that sukuk issuance in the Middle East could reach more than $14bn in 2012, with investor demand and the relatively lower volatility of the asset class driving sales. HSBC forecasts global sukuk volumes of $44bn in 2012 with Malaysia accounting for the dominant share of about 60%.

Showing initiative

King Abdullah bin Abdul-Aziz Al Saud’s initiatives are spread across the Saudi Arabian economy, with huge investments being made in education and housing and the introduction at the end of 2011 of unemployment benefits which will apply equally to men and women. Youth unemployment among males, however, is estimated to be at least 11% and represents a big challenge for the authorities. Also, with many more women going to university, finding jobs at the end of the process is increasingly difficult. The introduction of unemployment benefits demonstrates that the government is well aware of the serious structural problems it faces in regards to youth unemployment and a high priority is being given to expanding SMEs and creating job opportunities.

Can the authorities meet the challenges ahead? With oil output and prices rising, analysts are convinced that Saudi Arabia has the financial resources to maintain its many social, housing and education initiatives for some time, but creating the necessary jobs and building the SME sector remains a serious challenge.

While Saudi’s low debt and expanding income resources appear attractive, the country faces another huge challenge. The consumption of oil for the production of electric power is likely to touch 450 million barrels in 2012, at a cost ranging between SR14bn and SR18bn at world prices. This cost is expected to grow in the coming years, and while there is an increasing use of gas as a feedstock, how Saudi Arabia provides its energy needs is a growing concern, although solar and nuclear alternatives are under consideration.

Although plenty of challenges exist, Saudi Arabia is performing remarkably well overall. In a recent global analysis of 140 Saudi market-listed companies, the annual profitability recorded encouraging results during the year, posting an annual increase of 21% reaching SR94.4bn in 2011. Overall, the profitability results showed a rising trend, continuing from 2010, with the petrochemical industries sector up 38% to SR40.8bn and the banks and financial services showing growth of 16.5% to SR25.6bn.

With many of the government’s stimulus programmes only beginning to take effect and growing confidence in all sectors of the economy, many in Saudi Arabia and beyond expect 2012 to continue along the growth trajectory seen in 2011.      

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