Saudi Arabia`s 2006 economic performance strong
 
Khaleej Times

Despite a collapse in share prices that wiped out more than $500 billion off the stock market capitalisation, Saudi Arabia's economic performance was exceptionally strong in 2006, according to a Samba Financial Group report.

The report said that last year high oil prices pushed the budget and current account surpluses to record levels, but nominal growth remained in double digit, real non-oil private sector growth was well above its 10-year average and inflation was relatively subdued.

However, it said that the softer oil market this year would make headline numbers for Saudi Arabia look weak in year-over-year comparisons. As oil production declines in 2007, the 30 per cent of the economy that is made up of the oil sector is expected to contract by 6.3 per cent in real terms. Since revenues will be lower, the nominal oil sector GDP will also fall by 14 per cent.

Soaring oil prices have generated double-digit growth in nominal GDP in each of the last four years. Over this period the Saudi economy has almost doubled in size to $348 billion.

Official growth data for 2006 shows that the economy performed reasonably well last year despite a 53 per cent fall in the stock market. Real GDP grew by 4.2 per cent. This is lower than the rate recorded in 2005 because of a decline in oil production of around 3 per cent.

Non-oil private sector growth also eased slightly, though at 6.3 per cent it was well above its 10-year average. Non-oil industry was the fastest growing sector, though at 6.3 per cent it was well above its 10-year average. Non-oil industry was the fastest growing sector, at 10.1 per cent, spurred by higher petrochemicals and metals production. Transport and communication expanded by 9.5 per cent owing in part to the rapid increase in mobile phone subscribers and road transportation services.

"This period of strong nominal growth appears to have passed. We expect the economy to shrink for the first time since 2001 this year and there is little chance of further large oil price rises over the next few years. Earlier booms in the mid-1970s and the turn of the 1980s collapsed when declining oil revenues forced the government to cut back spending," said Brad Bourland, general manager and chief economist of Samba Financial Group.

"However, this boom is different. This should be demonstrated in 2007, which we expect to be the start of a period in which the non-oil sector can grow robustly despite little, if any, growth in oil revenues," he said in the report."On the face of it real GDP growth in line with our expectation for this year of 2.4 per cent in not impressive. Real growth was 4.2 per cent last year and 6.5 per cent in 2005," he added. "With work commencing on mega projects and others coming to fruition, manufacturing, construction and transportation are all likely to continue to post robust growth," Bourland said.
 

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The report said that work started last year on the $27 billion King Abdullah Economic City, one of the largest of the mega projects. During 2007 construction is set to commence on more of the six planned economic cities as well as the King Abdullah Financial District in Riyadh. Details of the fourth economic city, in Jizan, were announced in the last quarter of 2006. Heavy industry is the focus of the new city, which will host an oil refinery and integrated petrochemical complex, a copper refinery and smelter, an aluminum complex and an integrated alumina refinery. The bank estimates that projects worth over $300 billion are under way or in advanced planning for execution over the next few years.

The transportation and communications sector will benefit from the growth in construction, as a huge volume of raw materials have to be moved to their construction sites. The first full year of lower fuel prices will further stimulate the transportation sector. New mobile and fixed line telecoms licenses are due to be awarded this year, buoying momentum in the communications sub-sector, which continues to experience rapid growth stemming from a rapid increase in mobile phone subscribers.

The report said that petrochemicals dominate the major manufacturing projects entering production. The largest will be the Saudi Basic Industries Corp. (SABIC)-led $5 billion Yanbu National Petrochemical company (YANSAB) project in Yanbu. Once at full capacity, YANSAB will produce 1.3 million tonnes per year of ethylene, adding around 15 per cent to the Kingdom's total production capacity, together with significant quantities of ethylene glycol, polyethylene and polypropylene. Smaller petrochemical facilities owned by other companies are expected to enter production in the industrial cities of Jubail and Yanbu.

Another factor supporting growth in 2007 will be greater stock market stability. A collapse in share prices starting in late-February had a clear impact on the performance of some sectors last year. Growth in the retail sector slowed as many investors who made losses in share trading were forced to cut spending. Many more Saudis may have trimmed their spending due to a negative wealth effect. Even though most Saudis who bought shares more than two years ago or through Initial Public Offerings (IPOs) would still be carrying a profit, the fact that the shares were worth nearly three times as much earlier in the year has created large losses since the market peak.

Source: Khaleej Times