Saudi can tackle global downturn better – report

STRONG RESISTANCE: BAS-ML feels that Saudi Arabia’s external balances will also take a hit. (Getty Images)

Saudi Arabia appears to be better positioned to weather the downturn and run countercyclical policies, according to Bank of America Securities – Merrill Lynch (BAS-ML).

As per BAS-ML’s latest research report, the Kingdom will remain oil-reliant and will see a contraction in GDP by 0.2% in 2009 due to deep production cuts. Still, a large domestic market, savings and diversification efforts will lessen the blow the financial downturn, it adds.

“We believe that its (Saudi Arabia) large savings and relatively low systemic risks offer sufficient room to pursue counter-cyclical policies. The large domestic market in a closed economy increases the effectiveness of these policies,” the report says.

BAS-ML is positive about the political scenario in the world’s largest oil exporter. Saudi Arabia’s large and young population offers great potential, but employment may be a concern, the report adds.

The Gulf Kingdom is becoming less of an oil story and making efforts to diversify - the finance, construction, transport, communication and petrochemicals sectors have led to solid non-oil growth in recent years, which has averaged 4.6% since 2002 versus 2.7% in the 1990s, BAS-ML observes.

However, the financial giant feels that oil still drives the macros in Saudi. “With oil accounting for 88% of total exports, 87% of budgetary revenues and 31% of GDP, Saudi Arabia remains an oil story. Due to the steep oil price falls and OPEC output cuts, macro balances will deteriorate considerably.”

“We now expect GDP to contract by 0.2% YoY in 2009 and then recover slightly to 2.8% in 2010, with non-oil growth at 4%. We estimate that the budget surplus will erode completely and turn into a deficit of 7% of GDP, as the authorities are expected to maintain a loose fiscal policy stance.”

BAS-ML feels that Saudi Arabia’s external balances will also take a hit. It expects a current account deficit of 0.7% of GDP for Saudi Arabia.

Saudi Arabia has learnt from its past mistakes and there is a big room for fiscal stimulus, argues BAS-ML. “The Kingdom has been more cautious on spending than in past oil booms, saving 76% of the oil windfall between 2002 and 2008. Public debt fell from over 100% of GDP in the 1990s to 13.5% in 2008.”

Despite a mega investment project pipeline in recent years, fiscal policy has remained prudent and SAMA’s foreign assets of US$456bn offer a large cushion that should smooth the downturn, BAS-ML adds.

“Plus, Saudi Arabia has the region’s second-largest banking sector, with a large deposit base in an under-penetrated market. Despite the global turmoil, this large and closed domestic market should be a source of stable growth.”

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM