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Saudi Arabia: Investment programme starts to bear fruit

Global Arab Network - - Rabih Serrai

Tuesday, 20 December 2011 23:48

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Global Arab Network - High domestic spending and sound levels of liquidity are expected to offset any adverse effects of Europe’s debt crisis on the Saudi Arabian economy, and the Kingdom looks set to maintain its solid growth for the remainder of this year and into the next, Global Arab Network reports according to OBG.

Despite the cooling of many Western economies and recent forecasts from the World Bank that some Asian countries may see growth rates ease, Saudi Arabia’s GDP growth predictions have been revised upwards, with some expecting the expansion will be as much as 6.9% in 2011.

Though the Kingdom’s growth rate is then expected to slow in 2012 – estimates of expansion range from 4.5% at the lower end of the scale to 5.1% at the upper – the country is still poised to outperform most of it neighbours.

According to the minister of finance, Ibrahim Al Assaf, while the European financial crisis remains the main challenge to international economic growth, Saudi Arabia is well placed to overcome it. While other economies around the world are slipping in and out of recession, the Kingdom has continued to post growth throughout the extended period of the crisis, said Al Assaf.

“If worse comes to worst, I am confident that we have the means to deal with any renewed challenges,” Al Assaf told the Saudi Gazette in late November. “Notwithstanding the looming challenges facing the global economy, I am confident that Saudi Arabia’s immediate and medium-term growth prospects remain strong.”

Jarmo Kotilaine, the chief economist at the National Commercial Bank in Jeddah, agreed, saying that while a deepening of the crisis in Europe could weaken the purchasing power of currencies in the region, and in turn lower global oil demand, Saudi Arabia is ready to ride out any downturn, thanks to its long-term policy of diversifying the economy and investing in key infrastructure and social programmes.

“This consistency and clarity of the main principles of policy should serve Saudi Arabia well even in the face of a severe economic storm,” Kotilaine said in an interview with The Arab News on November 23.

Diversification of another sort may also help Riyadh should Europe return to negative growth. Having developed its export markets far beyond the continent, shipping to Asia, North America and closer to home, Saudi Arabia has built a buffer against the impact of a downturn in a single region hitting it too hard.

Adding to the promising expectations, Egyptian investment bank EFG-Hermes said in a report issued in mid-November that growth would remain solid going into the new year, despite an expected reduction in oil production due to Libyan supplies returning to the market. Much of this expansion would come as a result of state spending, the bank said.

“We see investment activity driving growth in 2012, with government commitment and resources,” the bank’s report said. “Project awards look to remain robust in the fourth quarter of 2011, which should lead to strong project activity into 2012. Planned projects are also set to increase in 2012, although we will see some spread into 2013 and 2014.”

Indeed, it would be surprising if there were not at least some of the spread that EFG expects. With the government committed to massive investments in housing, logistics and energy infrastructure, and health and education, the country’s construction sector is being inundated with lucrative contracts and may in fact struggle to meet all of the deadlines.

In the third quarter alone, contracts worth $25.3bn were awarded, following on from the $22.4bn of projects in the first half of the year, local media reported. With an even higher project roll out predicted for the last quarter of 2011 and into 2012, it is possible some work may fall behind schedule, though this will mean a more paced flow of funds into the economy.

One issue that Saudi officials will be keeping an eye on is inflation, which has been hovering around 5.2% for the past few months. Though consumer prices have not jumped excessively of late, there are concerns they could spike in the new year, as the government’s massive investment and spending programme – which includes wage increases for state employees – fully kicks in

Fairly secured against the weakening situation in Europe, and with solid fiscal foundations to sustain its domestic economy should the need arise, Saudi Arabia can look forward to 2012 with a degree of expectation, particularly as its investment programme starts to bear fruit. (OBG)

Global Arab Network

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