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Saudi Arabia has named education as one of its key areas of investment, in a bid to address the Kingdom’s high unemployment rates.

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The concern is that mass unemployment by 2014 could severely damage Saudi's GDP, estimated to be $517bn this year. Nevertheless, the government appears to be on the case, with education named as one of its key areas of investment during the Euromoney Saudi Arabia Conference in Riyadh last month. Finance minister Ibrahim Al Assaf revealed the state's $11bn budget forecast for economic development was 36 percent higher this year than 2008.

When discussing the government's plan for education and other public services, Al Assaf said: "The current expansion of investment expenditure which covers infrastructure, public services, education and health sectors will provide great trade and investment opportunities for the private sector.

"We are optimistic about the future of Saudi Arabia's economy. We are embarking on a policy of expanding, spending and investments so as to create opportunities for the private sector."

With Saudi's economy holding up for the time being, the government's upbeat outlook seems fair. Inflation eased to 5.2 percent in April, its lowest rate in almost two years, with further declines expected during this year's second half.

There are, however, signs that Saudi Arabia is feeling the pinch in some sectors. While the oil price plummet is the main concern, the banking sector has also suffered since the economic crisis kicked in.

News agency reports last month suggested the "crisis-hit banking sector" could no longer afford to finance several construction projects across the country. It was suggested that the government had stepped in and was now footing the bill for various developments, including the multibillon dollar Mecca-Medina high speed railway and $5.5bn Ras Al Zour water and power generation project.

But such comments receive short shrift from Constantinos Keypreos, banking analyst at corporate finance firm Moody's.

"I'm not sure whether they [Saudi banks] can't finance projects," he says. "The Saudi banks are liquid... but they are also selective. This is a more challenging operating environment, but I don't think it's an issue of being unable to fund projects."

Pouring further scorn on suggestions of illiquid banks, finance minister Al Assaf said in February that the Saudi central bank would boost deposits among local lenders. Doing so, he claimed, would offset the limited availability of foreign investment for Saudi developments while ensuring the country's banks can finance such projects.

"I expect the banking sector as a whole to remain profitable and adequately capitalised, and show asset quality even though we will see some deterioration in the current year," Kypreos explains. "I am confident that none of the banks will face serious problems like some in other countries."

The banking sector's performance, along with several other economic factors such as education, oil prices and living costs across the Kingdom, will be scrutinised in the coming months. Whether they point to a recession or stable economy remains to be seen. But Ghobril expects Saudi to remain relatively buoyant throughout 2009.

"It's a diversified economy and its population is larger than its expatriate base, which is not the case for other Gulf countries," he says. "It has huge surpluses in terms of foreign reserves and oil revenues and an excellent Central Bank policy.

"We have seen the decline in the stock market last year, but as an economy it's the largest one in the Gulf and entire world.

"It's the most diversified of our oil producers and there has been less speculation in Saudi than we have seen in other markets across the Arab world."

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