Saudi growth will rise to 3% in 2010

Dubai: Real gross domestic product growth in Saudi Arabia is expected to increase to 3 per cent in 2010, according to an annual economic report published by the National Commercial Bank.

The 2009 Saudi econ-omic perspectives report, titled The Kingdom Finding Light at the End of the Tunnel, provides an analysis of the country at the macro and micro levels by analysing financial indicators and the extent to which Saudi Arabia's performance has been impacted by the global financial crisis.

The projected growth, based on a predicted recovery in global demand and higher oil production, follows several massive fiscal stimulus packages under way to combat the global recession.

The NCB's report, while highlighting the expected growth in the upcoming year, forecasts a contraction in real GDP growth by 1 per cent in 2009.

The forecast comes at a time when oil prices have risen quite strongly since the first quarter, pointing to concern instead over the availability of bank credit and foreign direct investment.

"[Although] Saudi interbank rates have fallen and deposits are now growing faster than lending, private sector credit growth is still sluggish, due to lower investment demand and tighter bank lending," said Perihan Al Hussaini, Senior Economist at NCB.

The NCB report stressed that recent trends of tighter credit and increased risk aversion in international markets are the primary causes of the shortage of foreign capital, massive declines in local asset prices and lower investment.

Jane Kinninmont, Middle East editor and economist at the Economist Intelligence Unit, agrees.

"Credit to the private sector has basically stagnated since the start of the year. Now, the defaults by the Saad and Algosaibi group have alarmed local and international banks and there is concern that they will be more risk-averse about lending to Saudi corporations," she said.

Kinninmont added that there are probably further shocks to come in the next few months.

"Much will depend on the fortunes of the global economy, as Saudi Arabia is closely linked to the global economy through its dependence on oil," she said.

However, Saudi Arabia has undertaken significant efforts to diversify the economy away from oil in recent years, by developing manufacturing and services in an effort to increase levels of growth.

"Government investment expenditure will remain the key driver of growth in Saudi Arabia. This is based on aggressive fiscal policy plans emphasising capital expenditure as well as indirect fiscal stimulus measures to support the non-oil sector. With large accumulated reserves and low levels of domestic debt, we believe that Saudi Arabia will be able to spend its way out of the crisis," said Dr Saeed Al Shaikh, Senior Vice-President and Chief Economist at the National Commercial Bank.

Though optimistic, Perihan revealed potential hazards to growth in 2010.

"First, if the global demand remains weak, rising inventory and excess refining capacity will likely keep oil prices low for a prolonged period.

"This will incapacitate the government's ability to increase expenditure and erode confidence levels.

"Second, a marked deterioration in banks' balance sheets will weaken the banking sector's role in financing private investment expenditure plans and support economic growth."