Saudi Arabia Economics – August 2010

August 22, 2010

Editor’s Note:

Today we are pleased to provide the August 2010 “Saudi Arabia Economics” from Dr. John Sfakianakis of Banque Saudi Fransi. The report looked at the expanding role of food prices in driving inflation in Saudi Arabia. Sfakianakis reminded readers that food and beverage inflation traditionally escalates just before and during the holy month of Ramadan which began on the 11th of August. He noted that food price inflation could drive the overall rate to 5.3% for 2010. We thank Dr. Sfakianakis and his staff for their work and for sharing it here.

[Visit HERE for the complete report including insightful charts and graphs.]

Saudi Arabia Economics – August 2010
Dr. John Sfakianakis
Banque Saudi Fransi

Pressure on prices
Food costs in focus as Ramadan heralds further rises

  • Food price inflation likely to pick up, residential rents, goods and services could push headline 2010 rate to 5.3%
  • Saudi food prices resilient despite Jan-Jun declines in global food prices
  • Saudi oil production rose in H1 on Asian demand; H2 outlook more nebulous as global growth jitters pervade
  • Non-oil exports, imports weaken in June, economic recovery intact

Rising food prices are typically a source of contention during the holy month of Ramadan and with the cost of food being a principle driver of escalating Saudi inflation rates in recent months, this year promises to be no different. On August 11, most of the Muslim world commenced a month of fasting from sunrise to sunset each day. Food price inflation customarily accelerates across the Arab world just before and during Ramadan as families host large meals to mark the breaking of each day of fasting, known as iftar, and wealthy citizens sponsor meals for the less fortunate at mosques and other venues. Food consumption rises overall, typically placing pressure on the cost of meat, chicken, rice, vegetables and fruits.

Inflation has re-entered the spotlight this year in Saudi Arabia, which is now experiencing the highest rates of inflation in the Gulf region, touching 5.5% in June, the highest level in more than a year. Pressure on food prices could become more elevated in the short term due to greater demand in Ramadan as well as short-term external factors, such as higher global food costs caused by some poor harvests (Russia) and a weaker U.S. currency, which tends to push agricultural product prices upward. Although annual rental inflation continues to ease as supply bottlenecks are slowly resolved in the kingdom, this will unlikely prevent any drastic decrease in the headline inflation rate. Keeping these factors in mind, we are raising our 2010 inflation forecast to 5.3% from 4.7% in expectation that the cost of food, residential rents, goods and services could stimulate prices. Current inflationary pressures are elevated given below trend aggregate demand, low monetary pressures and gradual private sector growth.

Accelerating inflation in 2010 is taking place against an improving macroeconomic backdrop supported by oil prices averaging $76 a barrel in July, higher oil production, stronger business confidence, gains in retail appetite, higher export flows, better rates of bank credit growth and greater tourist visits. Following a census this year, the government also revised higher the Saudi population to 27.1 million people, including 8.4 million, or 31.1%, non-Saudis. There has been no notable decrease in economic activity so far this summer – banks have concluded a number of large financing deals for strategic projects and private investors appear to be building their presence, albeit gradually, in the domestic market. The month of Ramadan usually coincides with a slight slowdown in commercial activity as companies observe shorter working days and take a week-long holiday to celebrate Eid al-Fitr marking the end of the month of fasting.

State spending, including fiscal outlays that are the highest among G20 countries as a percentage of GDP, continues to provide consistent support for Saudi Arabia’s economic recovery, which will lead to an acceleration of real economic growth of 3.9% this year compared with 0.6% in 2009. Private sector engagement in the economy has witnessed a moderate comeback, evidenced in rising money supply growth rates and six months of consistent growth in private sector bank credit. Loans worth an estimated SR73 billion should be booked by banks in the second half and into the first months of 2011.

The Ramadan effect

Saudi Arabia is a major importer of foodstuffs, with imports of live animals, vegetables and other foodstuffs accounting for 14.9% of total imports in 2009. Fluctuations in global prices for essential commodities, as well as changes in currencies, thus have ramifications for the domestic market. However, food prices in Saudi Arabia have been fairly resilient amid fluctuations in global food prices in the first half of 2010. Ac- cording to the Food and Agriculture Organisation’s monthly food price index, food prices have been falling since Janu- ary following a six-month spike. The IMF’s index tracking food prices, meanwhile, showed a drop of almost 5% year-on-year in June. By contrast, official Saudi food prices tracked by its cost of living index have continued to rise steadily, advancing 2.5% between December and June.

This possibly points to a lag between global price changes and their implementation in the domestic market. It also indicates that a good deal of food price inflation in the kingdom results from domestic factors and is not merely due to import costs. Saudi Arabia has a liberal food import regime, enabling a myriad of food import companies to operate. Still, the food market is not perfectly competitive. Seasonal factors, as well as market and price dynamics, lead some retailers to hesitate passing along cost savings to consumers and vice versa – in times of global food inflation, they do not raise the retail price of essential foods as quickly as their import costs accelerate.

Food price acceleration has not been isolated to Saudi Arabia. In March, food price gains outpaced the overall inflation rate in all Gulf countries except Oman, with the highest rate of price rises in food of 5.9% recorded in Kuwait. Still, housing price corrections continue to weigh heavily on consumer price indices in the region. In Qatar, which continues to experience annual deflation, the rent, fuel and energy index slumped 14.5% in June.

The trend of rising food prices is likely to continue in August and September, during which the Islamic month of fasting falls this year. Food prices typically go up during Ramadan, especially for meat, poultry, vegetables and fruits. Families and businesses host Ramadan feasts to mark the end of each day of fasting, which takes place from sunrise to sunset.

Exploring the official data, we found that price distortions have taken place in Ramadan year after year. Month-on-month food price inflation has generally been faster in the month or two leading up to Ramadan and during the holy month. In 2009, for instance, inflation rates declined rapidly as global commodity prices slumped, easing pressure on domestic prices and leading headline inflation to fall by half in the nine months after a July 2008 11.1% peak. Monthly headline inflation rates declined consistently in the first six months of 2009, but in August and September – in conjunction with Ramadan – prices rose 1% and 1.3%, respectively. Similar trends are evident in each of the preceding five years.

Hence, this signals that spikes in the Saudi food inflation rate in July and August are bound to take place this year as well. Inflation accelerated to 5.5% in June – the highest rate in more than a year. That happened as food and beverage inflation advanced 0.6% in June compared with May following two months of easing food prices.

Commodities such as rice, mutton, chicken, fruits and vegetables tend to become more expensive just prior to and during Ramadan as wholesalers boost their inventories and demand increases. The most visible and consistent increase is in the price of meat, fruits and vegetables, according to data of the Central Department of Statistics & Information (CDSI).

Consumer food prices have quite closely tracked wholesale prices, although the correlation has lost some traction since 2008. Wholesale prices remained largely steady during 2009 and even fell in the first quarter of 2010. Over the same period, the consumer food index has outpaced the wholesale food index. Assuming the wholesale index is widely representative of producer product prices, this could signal a greater pass through of price rises onto consumers. In the second quarter, Saudi dairy firm Almarai Co beat analyst forecasts with a 19.5% rise in quarterly net profit, although its parent firm Savola Group posted a decline in net profit.

Quickening price outlook

Rising food prices may not translate into higher overall headline inflation, however, being largely offset by a number of factors. For one, the annual pace of rental inflation has weakened consistently in 2010. Importers, meanwhile, benefited this year from the comparatively strong U.S. dollar, which strengthened the dollar-pegged Saudi riyal’s purchasing power abroad. Still, given the pace of food price inflation and a general acceleration in the cost of goods and services, we are raising our 2010 Saudi inflation forecast to 5.3% from 4.7%, bringing it 0.2% above 2009 inflation. We expect to see an acceleration in inflation in July and August in conjunction with Ramadan, and while inflation could ease in the final months of 2010, it is unlikely to do so substantially, with risks to the upside should food and rents accelerate greater than anticipated.

The government’s fiscal spending is not, in our view, leading to inflationary pressures due to higher aggregate demand on capital goods, and labour. Imported capital goods face intense competition among local suppliers and due to global excess capacity they are better priced today than 2008. EPC (Engineering, Procurement and Construction) costs have substantially decreased such as SATORP (Saudi Aramco Total Refinery Petrochemical Company), by 30%-40%, the Yanbu refinery by 15%-20%, as well as some major Saudi Electricity Company (SEC) power projects.

Construction labour remains affordable, wages are not on the rise and in ample supply as there are no regional demand pressures. Private sector wages have slightly increased over the past year but no enough to cause wage inflation or induce a price/wage spiral. We do not think that public sector wage increases have led to build-in price pressures.

The 9.6% electricity tariff instituted on July 1, for commercial, government and industrial users could contribute to some inflationary pressures over the coming months for end-users in certain products. Labour intensity, rotation, seasonality, energy intensity and firm size would determine the real impact of the tariff on final production costs. For non-energy intensive users electricity accounts 1%-3% of the overall production cost. For the energy intensive industries, such as steel, electricity can account up to 15% of the final production cost. We estimate the new tariff, on average, for the non-energy intensive firms could add an extra 2% in final costs whereas for energy intensive firms, it could add an extra 5%-7% to final costs. Measured tariff increases canmotivate firm-level efficiency changes based on capital investments. However, exorbitant electricity tariff hikes, over a short time span, that are industry-specific could eventually hamper its competitiveness, add to further price pressures and perpetuate inefficiencies at the electricity generation and household levels.

Housing costs, particularly rents, emerged as the key driver of inflation in 2007 and 2008. While rent inflation remains high, its pace of year-on-year increase declined to 9.2% in June compared with 12% in December. Over the same period, inflation in food and beverage prices has picked up pace quickly, rising year on year by 6.2% in June from 0.9% in December. The rise in food prices, particularly over the past three years, has prompted citizens, especially those with fixed and low incomes, to set aside a greater allocation of household expenditures for food products.

While rents remain the biggest driver of inflation over all, food is narrowing in, and if this trend continues, food could become the biggest contributor to headline inflation in the coming months for the first time since late 2007. Rents are expected to rise once again toward the final months of the year.

Some external factors are also likely to keep inflation rates under control in the kingdom. In India, a key supplier of food items (mainly rice) for Saudi Arabia, forecasts that revived monsoon rains in August and September will lead to strong harvests of basmati rice and other crops bodes well for Saudi food prices post-Ramadan. Saudi Arabia’s share of India’s agricultural exports has been growing steadily in recent years, rising to 8.5% in 2008-2009 from 5.7% in 2006-2007, according to data of India’s Agricultural and Processed Food Products Export Development Authority. Over that period, the value of Indian agricultural exports to the kingdom surged 150%, the data show.

Therefore, when India suffered its driest season in nearly four decades in 2009, this affected Saudi retailers who until the end of last year, benefited from a two-year state subsidy on the cost of rice, at an annual cost of around SR900 million. The subsidy was introduced in 2007 when food prices soared due to surging global commodity prices and the weak U.S. dollar. In 2009, Saudi Arabia – a top global importer of rice – imported SR13.09 billion worth of goods from India (3.6% of total Saudi imports and 11.7% of imports from Asia). India, the world’s second-biggest producer of rice after China, manufactured almost 20% of the world’s rice and accounted for 7.2% of exports last year. On the consumer front, Saudi Arabia accounted for 3.1% of global rice imports in 2009 and 7% of imports by Asian countries.

The FAO’s Rice Market Monitor predicts Saudi Arabia’s rice imports will drop to 840,000 tonnes in 2010 compared with 900,000 tonnes last year and one million tonnes in 2008. It attributed the falloff to a state decision to end a two-year practice of subsidising the cost of rice at SR1,000 per metric tonne. But rice prices have fallen significantly off high levels of 2008 and early 2009, which will likely temper inflationary pressures. Indian basmati rice prices faced a couple of small spikes in July but overall, they are much cheaper than they were in 2009.

The same trend is evident in Pakistan, where the cost of rice per tonne was $760 in June, compared with $1,100 a year earlier and $880 in March, according to FAO data. Russia, which accounted for 0.7% of Saudi imports last year, is suffering its worst drought in more than a century, causing grave implications for its wheat harvest. By contrast, in Brazil – which took a 2.5% share of Saudi imports last year – the 2010-2011crop is up 30%.

Drought in Russia, Ukraine and Kazakhstan, among the world’s top 10 wheat exporters, is surely taking a toll on global supply and prices; wildfires in Russia devastated crops, leading prices to soar and analysts to forecast that Russian wheat production in 2010-2011 could drop by more than 27%. We do not expect recent spikes in soft commodity prices, particularly for wheat, would last long or be comparable to those experienced in 2007-2008; any shortages in Russian supply would be mitigated by a strong U.S. wheat harvest. The U.S. Department of Agriculture estimates U.S. stockpiles of wheat by the end of next May will reach a 23-year high of 30 million tonnes, whereas in 2007-2008, the inventories had fallen to a record low of 8.3 million tonnes. World supplies, according to U.S. government estimates in July, stood at a comfortable 187 million metric tonnes, well above the 124 million tonnes produced in 2007-2008.

Longer-term potential drivers of soft commodity prices include changes in dietary habits of developing countries, population growth and a decline in arable land. While prices of basic commodities like rice may be artificially boosted during Ramadan to cater to demand, food prices are unlikely to continue rising substantially in the final months of 2010 unless global supply disruptions are witnessed in the short term.

Tourism poised for pickup


Religious tourism during the month of Ramadan is likely to boost tourist traffic in the third quarter as Muslims travel to Makkah and Medina. Saudi Arabia’s Tourism Information and Research Centre projects third quarter internal tourist nights will rise 10% to 26.2 million while expenditures advance 8.3% to SR5.2 billion.
Saudi domestic tourism is also expected to rise 6% to 79.5 million tourist nights, with tourists spending SR13.2 billion in the three months, up 3.9% from last year. The centre also foresees a 14.8% gain in Saudi tourist nights in destinations abroad in the July-September period compared with last year to 18.6 million nights, while expenditures are seen climbing 16% to SR5.8 billion.

Oil prices, production strengthen

The most important barometer to gauge the health of the Saudi economy continues to be the oil price since the kingdom derives about four-fifths of annual revenues from the export of crude oil. Despite some short-term turmoil in crude prices in May stemming from the euro-zone debt crisis and risk- aversion, oil prices have remained resilient this year at above $75. Between January and the end of July, crude oil prices averaged $78 per barrel.

It was two years ago in July that oil prices hit record levels of close to $150 a barrel before plunging to almost a fifth of that level in a matter of months as the extent of the world’s financial troubles became clear. This July, oil prices averaged $76 a barrel – a level that, while far from 2008 peaks, falls comfortably within a range widely cited as an ideal price for producing and consuming nations. Several Saudi policymakers have argued that oil at $75 or stronger is needed to encourage investment in building capacity to prevent future supply bottlenecks once the global economy has recovered.

OPEC has kept its output target unchanged since slashing output in December 2008 in response to the global recession, but member states have incrementally raised output this year to meet growing demand. Saudi production in June was 2.5% higher than it was in the second quarter of 2009. While overall OPEC production, excluding Iraq, was relatively steady in June, the kingdom’s production witnessed a notable rise to 8.21 million barrels per day compared with 8.16 mbpd in May, according to OPEC’s Monthly Oil Market Report, which cites secondary sources.

The biggest growth in oil demand in 2010 comes from China, where demand is forecast to grow 5.5% this year, while demand from Middle East, Latin America and other Asian countries are all poised to experience growth rates of more than 2%, OPEC estimates. These trends benefit Saudi Arabia, which is a major exporter of crude oil to Asia and thus could explain the incremental rise in Saudi production levels this year. Saudi exports to Asia in 2009 were 144% higher than they were in 2003, now accounting for 59% of total exports, compared with 50% of exports in 2003.

Investing in farmland

A global food crisis in 2008 served as a wake-up call for Saudi Arabia, which relies on imports for about 70% of food supplies, and is thus susceptible to price swings and supply shortages on global markets. The kingdom’s vulnerability was heightened by its plan to phase out production of some water-intensive crops following decades of rapid depletion of non-renewable water resources. The country needs about 2.7 million tonnes per year of wheat and rising, 800,000-1 million tonnes of rice, and 6.3 million tonnes of barley (about 45% of total global exports). In total, it demands about 14 million tonnes of animal feed each year for livestock.

Up to 2008, according to the U.S.-Saudi Business Council, Saudi Arabia was paradoxically a net exporter of wheat despite having among the world’s lowest renewable water resources. In order to face challenges of shrinking water resources and global food shortages, a government initiative was unveiled to reduce wheat production by 12.5% per year until halting it completely by 2016. In January 2009, the King Abdullah Agricultural Initiative, took effect. Backed by a SR3 billion government-sponsored investment fund, the initiative aims to improve long term food security by enabling private Saudi businesses to invest in agricultural projects in countries better suited for crop cultivation, including Ethiopia, Turkey, Vietnam, Egypt, Kazakhstan, Ukraine and Sudan.

Saudi Arabia hopes to secure supplies of essential commodities such as sugar, rice, wheat, barley, soybeans and maize, livestock and animal feed. Given the scale of investments required, the fund would need to be enhanced if it is to achieve a stated goal of building a strategic reserve of basic commodities to avoid any future food crisis.

Kazakhstan’s largest crop is wheat, it ranks as the sixth largest in the world. However, agricultural lands were depleted of their nutrients during the Soviet era which continues to impact production today. Ukraine provides opportunities for agricultural production (barley and wheat) but like Kazakhstan governance, infrastructure, and transparency issues are challenges for potential investors. Similarly, Sudan’s agricultural potential could be significant but infrastructure, the hydropolitics of the Nile and stability challenges cannot be ignored. Turkey’s dynamic macroeconomic profile, stable politics and elevated rule of law has attracted foreign investors. Wheat, first domesticated in southeastern Turkey, is widely produced although traditionally it imports Black Sea wheat from Russia. However, weak harvests are not uncommon due to drought and there is no legal settlement of the usage of the Tigris and Euphrates rivers by the riparian states, Turkey, Syria and Iraq.

Vietnam’s attraction is due to its rice production capacity, being the world’s second largest rice exporter after Thailand. Vietnam is one of Asia’s most open economies and among the world’s fastest growing. Egypt’s agricultural potential is constraint by limited arable land, a growing population and water inefficiencies. Finally, Ethiopia’s agriculture potential is vast but would require considerable infrastructure investments as well as better reorganization. Ethiopia is often ironically referred to as the “water tower” of Eastern Africa because of the many (14 major) rivers that pour off the high tableland. It also has the greatest water reserves in Africa, but few irrigation systems in place to use it. In 2008, the United Nations World Food Program helped feed 11 million people in Ethiopia, which suffers from crop failures and food distribution problems. However, there are other countries that need to be carefully examined, notwithstanding their own specific challenges, including Brazil, Argentina, Canada, New Zealand and Australia which offer predictability, rule of law and macroeconomic stability and an extensive farming experience.

Investing in agriculture abroad is easier said than done because the investments are often politically charged and local players could regard Gulf investors as potential “land grabbers”. Certain sub-Saharan African countries are themselves often net food importers, adding to the investment risk, particularly given severe climate changes occurring globally (the first half of 2010 was the warmest on record). Private sector firms, meanwhile, would need support of local governments to develop infrastructure. The FAO estimates that, in addition to public investments, $209 billion in gross annual investments are needed in primary agriculture and downstream services in developing countries to meet global food requirements by 2050.

For the initiatives to succeed, Saudi private investors should have access to crucial investment information about target countries so they can base their decisions on geography, political risk, rule of law and domestic economic and infrastructure conditions. The Saudi government has acted as a facilitator between investors and some of the countries under consideration. Even with these elements in place, the system would need to be tested during a food supply crisis at domestic and/or global levels. Private investors looking for higher profits could seek to export their crop to global markets instead of Saudi Arabia. Offtake agreements – signed between producers and buyers of resources – will need to be tested for how legally binding they are and whether the purchaser will be required to incur upfront infrastructure investments. Still, offtake agreements offer little investment risk especially in mature and developed economies.

Saudi Arabia could also look to strike strategic alliances, not necessarily based on equity acquisitions, with global food giants with decades of experience and local field knowledge. These multinational companies offer enormous economies of scale, vertical integration, financing, research capabilities and global strategic alliances. Forging such agreements could facilitate access to either land in sub-Saharan Africa and elsewhere or to final products.

Trade flows looking down

Non-oil exports fell as demand for petrochemical products declined in June after an increase in May. Data of the CDSI shows that non-oil exports in June fell 11.4% compared with May as petrochemical and plastic exports contracted 13.8%. The value of imports fell in June by 12.7% from the month earlier. Seasonality accounts for the volatility in non-oil import volumes.

Currency-related pressures on imports advanced slightly in July and started subsiding in the second week of August as the dollar gained some of the ground it lost against the euro and other global currencies – but there is a lag effect which the import market will witness in the months to come. The U.S. currency, to which the Saudi riyal is pegged, rose steadily between December and June, somewhat reducing the cost of imports and giving Saudis greater purchasing power abroad.

Further weakening of the dollar in the second half could raise the Saudi import bill slightly, potentially stirring some inflation, although we do not anticipate any substantial consequences. Since most of Saudi Arabia’s import bill is paid for in dollars, it is inflation in the kingdom’s major trading partners that matters more. For the moment, inflation rates are not as concerning as they were in 2007 and 2008. Still, given low money supply growth and an economy growing yet below trend, it is stickier and less benign than before.

Interest rate policy is also likely to remain static for the remainder of the year. The Saudi Arabian Monetary Agency (SAMA) has not shifted its repurchase rate since January 2009 and its reverse repurchase since June 2009. We anticipate SAMA will continue to uphold this policy through the end of 2010 unless there is a notable rise in inflation.
Interbank rates have remained largely unchanged for months. The central bank is keeping official rates low as it tracks the policy Federal Reserve, which complements its own need to try to compel liquidity-flush Saudi banks to lend their surplus cash rather than hold onto it as they continue to do. Saudi banks have raised their foreign assets by 13.2% since January in favour of overnight deposits with SAMA, which have fallen almost 25% since then.
Banks are starting to lend more but they are still hesitant as they continue to deal with bad debt troubles that surfaced in 2009, albeit at much lower levels than those experienced in other Gulf states and globally.

Nonetheless, the pace of consumer lending growth picked up in the second quarter, reaching almost 10% compared with 7.2% in the first quarter. Private sector credit to utilities and health surged 38% in the second quarter while loans to transport and communications gained 9.6% and to the oil and gas sector rose 17.7%, according to SAMA data.

While lending to the private sector is up, bank deposits have grown at a faster rate, leading to a reduction in the loan-to- deposit ratio to 80.5% in June – compared with 87% at the start of 2009 and above 90% in late 2008. Still, we expect that the combination of improving bank credit, strong oil prices and a moderate revival of private sector participation signal that the second half of 2010 will witness reasonably better performance for the economy than the first half.

FDI strong despite recession in 2009

Foreign Direct Investment (FDI) into Saudi Arabia in 2009 fell 7% off peak 2008 levels although it remained well above historical levels, according to the 2010 World Investment Report released by the United Nations Conference on Trade and Development (UNCTAD) in July. Saudi Arabia also invested more abroad, with outflows of FDI of $6.53 billion representing a more than four-fold gain on the previous year.

The report, which showed world FDI flows plummeted 43% during the global recession, indicated that Saudi Arabia received the greatest amount of FDI in the Gulf region. The kingdom attracted more FDI than Brazil, where FDI dropped 42.4%, and India, where FDI declined 14.4%. FDI into debt- stricken United Arab Emirates plunged 71%, while foreign investment flows into Bahrain, Jordan, Oman, Syria and all of North Africa also eased. FDI flows into Qatar and Kuwait rose. Although Kuwait’s FDI was a merely $141 million it had the highest FDI outflow in the region of $8.7 billion compared to $6.5 billion for Saudi Arabia and $3.7 billion for Qatar. The resilience in FDI during periods of crisis was similarly experienced by East Asia during the 1997-1998 financial crisis, by Mexico amid the 1994-1995 crisis and during the Latin American debt crisis of the 1980s.

We had anticipated Saudi Arabia would record a sharper decline in foreign investment last year as economic growth fell to 0.6%.The key driver of growth in 2009 was state rather than private funds, particularly as a seizure in global credit markets made financing scarce for development projects.

UNCTAD did not provide a sector breakdown of FDI flows. In 2008, petrochemical and refining industries and real estate accounted for most of the growth – the former attracting 57% more investment than the prior year and the latter getting four-fold more in funds. We expect there were no significant structural shifts in distribution last year. However, there are some points of caution when looking at FDI data. Inflows into some countries could be inflated due to intra-regional flows and the differentiations between licensed and actual FDI flows. Moreover, in certain countries UNCTAD may overly rely on government data. Not all FDI, meanwhile, acts as a boon for the economy or spurs job creation.

Nonetheless, Saudi Arabia’s unique position among G20 nations for fiscal soundness due to falling levels of public debt and rich foreign asset holdings has made it stand out among regional peers as a sound investment case. Crude prices in 2009 were still higher than 2005 levels.

With the state raising rather than easing its project financing burden in 2010, FDI flows are likely to face another tough year. ConocoPhillips pulled out of a giant refinery project and Dow Chemical and Saudi Aramco scrapped plans to build another refinery. After failing to get adequate private interest, meanwhile, the government asked Saudi Aramco to build the Jizan refinery. These and other events could have a toll on FDI flows in 2010. But Saudi real estate prospects have remained stable despite sharp price corrections in neighbouring UAE and Qatar – which has strengthened the kingdom’s investment case. We recommend that Saudi Arabia continue to take steps to improve the investment climate for both domestic and foreign capital.

Disclosures and disclaimers in the original document

Source: Banque Saudi Fransi

Contact Info:

Dr. John Sfakianakis – Chief Economist
Tel: +966 1 289 1797 – Email: johns@alfransi.com.sa
Turki A. Al Hugail – Economic Research Analyst
Tel: +966 1 289 1163 – Email: talhugail@alfransi.com.sa
Daliah Merzaban – Economic Analyst
 Tel: +971 4 428 3608 – Email: dmerzaban@alfransi.com.sa

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