By Rob Morris
Saudi Arabia has tackled the slump better than most. But what does the future hold?
Saudi Arabia has tackled the slump better than most, thanks to a huge petrodollar surplus and continued government spending. But what does the future hold?Cushioned by oil revenues and deep currency reserves, Saudi Arabia seemed almost immune to the downturn. The largest of the GCC countries, it earned some $285bn from crude last year alone and seemed prepared to languidly wait out the crisis, supported by federal funds.
But the International Monetary Fund delivered a jolt earlier this month. The organisation, which oversees the global financial system, predicted the Kingdom's economic growth would shrink 0.9 percent this year (from 2.8 percent in 2008, according to government estimates) following a slide in oil revenues. Growth across the Middle East's oil exporters would slow to 2.3 percent this year, it said, down from 5.4 percent in 2008.
Largely to blame are volatile oil prices. Since last March, crude has plummeted from $147 a barrel to less than $50, a direct consequence of dwindling global demand. The upshot, IMF says, is that the region's biggest oil exporters won't escape unscathed from the downturn, although they remain better positioned than most.
"Nearly all countries in the region will be seriously affected by the global crisis in important but different ways," the Fund notes. "The Middle East and North Africa will be negatively affected by the current global economic crisis, but it is likely to fare better than many others."
Saudi, however, is not leaving anything to chance. The Kingdom has announced a sharply expansionary budget aimed at bolstering its domestic economy, and has said it plans to press ahead with $400bn worth of infrastructure projects over the next five years. These long term projects are also seen as the cornerstone in the oil exporter's bid to address its youth bulge and high unemployment rate.
The government has commissioned development of six economic cities, costing $150bn in total, to create more private sector jobs and boost Saudi skills. Among them, Knowledge Economic City will be a technology industry hub offering 20,000 jobs, while Prince Abdulaziz Bin Mousaed Economic City is expected to house various private companies. Elsewhere, Jizan Economic City in Jeddah is a 100 sq km site that will have a privately owned oil refinery producing 500,000 tons of steel per annum.
State-owned finance body Saudi Arabian General Investment Authority (SAGIA) predicts the cities will contribute $150bn to the Kingdom's GDP and provide job opportunities for 1.3 million people when finished.
Nassib Ghobril, head of economic research at Byblos Bank, is convinced that the government's policy to spend big on these cities during crunch times is the right move.
"The question is whether the economic cities will have an impact on the economy's growth - definitely," he says. "This is the way for the Kingdom of Saudi Arabia to maintain economic growth during the regional and global slowdown."
Ghobril's argument is backed by a 30 to 40 percent drop in construction costs, which the Saudi state is taking full advantage of.
When speaking to reporters this month, SAGIA's governor Amr Al Dabbagh said depressed prices were reducing the cost of Saudi's mega projects, which was encouraging the state to press ahead with its plans.
"Now the challenge is how much we can do in 24 hours, seven days a week," he said.
Aside from generating more jobs, the economic cities are expected to address a chronic skills shortage among Saudis. Arabian Business reported earlier this year that new jobseekers lack the expertise needed to secure private sector jobs. An outdated education system was blamed for the skills shortage, which is forcing many young adults to accept menial, entry level jobs.
Considering more than 60 percent of the Kingdom's population is estimated to be below 18 years old, the future looks far from rosy. A 112 percent increase in the total workforce is expected during the next five years, further swelling a job market dominated by expatriates.
Abdul Wahid Al Humaid, Saudi's deputy minister of Labour, revealed earlier this month that the number of expatriates living in Saudi Arabia hit 10 million late last year. Foreigners now account for 83 percent of all private sector jobs.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."For all the latest market news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.