Editor’s Note
Last week Jadwa Investment introduced a report on the Saudi economy called the “Chartbook” which provides a monthly review of developments across the spectrum of economic and investment issues. This week Jadwa published a forecast of “The Saudi Economy in 2010.” In addition to an overview of the year ahead and discussion of the global economic environment, it provides a broad look at the Saudi economy including the oil market, growth and inflation forecasts, the current account and fiscal policy, monetary policy and exchange rate issues. The report concludes with a snapshot of the 2011 economic outlook. SUSRIS thanks Jadwa Investment’s Chief Economist, Brad Bourland, and Head of Research, Paul Gamble, for providing this insightful product for your consideration. Today we provide an overview of the report and recommend you review the entire report to gain an important understanding of the year ahead in the Saudi economy.
Complete report:
The Saudi Economy in 2010 – Jadwa Investment
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The Saudi Economy in 2010
The Saudi economy is expected to improve in 2010. Growth will pick up, credit will become more readily available and the government budget will return to surplus. High government spending will be the main engine of growth, with the private sector making a greater contribution as credit conditions improve. A reviving global economy should keep oil prices around their current levels and will increase demand for the exports.
Lack of confidence was an important factor holding back the Kingdom’s economy in 2009. This was reflected in a fall in bank lending, restrained corporate and consumer spending and a subdued stock market. Economic data suggest that confidence has begun to improve and we expect a virtuous circle in which this feeds into higher spending, boosting corporate performance, lifting share prices and encouraging banks to lend. As a result, real growth of the non oil private sector is forecast to rise to 3.8 percent; total real GDP growth is projected at the same level.
The key issue for economic policymakers will be maintaining an environment that supports this recovery. We therefore think that government spending will be in excess of the high level set out in the budget and that interest rates will remain very low. These stimulative policies are not expected to have negative consequences elsewhere in the economy. Higher average oil prices and production should generate sufficient additional revenue to ensure a budget surplus. In the event of a deficit, it would be comfortably financed using the Kingdom’s huge stock of foreign assets.
As bank lending will only slowly respond to low interest rates, inflation will not be a problem, though at an average of 4.5 percent it will be high on an historical basis. We anticipate that inflation will pick up over the first few months of the year, before gradually declining from the second quarter. Rents will remain the main source of inflation in the Kingdom, though the spike early in the year will be the result of external factors. With interest rate needs broadly aligned between the Kingdom and the US, we do not anticipate significant speculative pressure against the exchange rate peg.
Although the economic recovery will gain momentum, activity will be less vigorous than in recent years as the legacy from the economic and financial turmoil lingers. The global economic recovery does not appear built on solid foundations and once stimuli are removed, growth is likely to be weak. Within the Kingdom, bank lending practices have permanently changed and credit growth will remain well below the level of the boom years to 2008, constraining the private sector. Government spending is central to relatively healthy economic outlook, but after years of strong growth it is likely to require an oil price in excess of $70 per barrel to balance the budget.
The global economic outlook
The global economy entered 2010 in far better health than it started 2009. A depression has been avoided and growth has resumed across the world, but it has taken extraordinary measures to get to this situation. Government spending has shot up, interest rates have been cut to exceptionally low levels and unprecedented measures have been taken to support the financial system. These policies are unsustainable. The unwinding of these stimuli and need for longer term adjustments to consumption patterns mean that once the initial boost to the global economy fades, growth over the next few years will be tepid.
The global recovery that is underway will be pretty strong until the middle of the year. The factors behind this are supportive fiscal and monetary policy, the rebuilding of stocks, rising corporate profits boosting investment and housing not being such a big drag. Economic growth will moderate in the second half of 2010 as the policy stance moves to restraint, inventory replenishment runs its course, deleveraging continues, low capacity utilization restrains investment and emerging economies supply their own demand; tighter financial regulation could be additional burden.
Risks to this weak outlook are on the downside. The withdrawal of policy has to be careful; too soon and it brings the risk of a double dip recession, too late raises the prospect of inflation and currency depreciation. Political pressures also pose a major risk. Growth is unlikely to be at a pace necessary to dent unemployment and with elections due this year in several leading economies greater protectionism is a possibility. Seventeen of the G20 members have introduced protectionist measures since they pledged not to do so in late 2007. There are still serious problems within financial sector. More needs to be done to clean bank balance sheets (to date, only around half of the $3.4 trillion in write downs projected by the IMF have occurred) and there is an increasing divergence in performance between weak and strong banks. Ongoing fallout from the crisis, such as recent problems in Dubai and Greece, also remains a risk.
For the complete report..
The Saudi Economy in 2010 – Jadwa Investment – SUSRIS Documents 2010
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About Jadwa Investment – Jadwa Investment is a Saudi Closed Joint Stock company operating under the supervision of the Saudi Arabian Capital Markets Authority (CMA). Under the CMA decision published on August 21, 2006, Jadwa was awarded a license to offer all types of investment services including dealing, managing, custody, arranging and advising. All investment services offered by Jadwa Investment are supervised by a Shariah Supervisory Board and are fully Shariah-compliant.
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