By Massoud A. Derhally
With growth of six percent forecast for 2012, the biggest challenge is delivering on potential
Some things never change. When the Arabian Business 2011 Rich List was published last December, all the top five entrants were from Saudi Arabia. The country accounted for an incredible 30 names in the top 30.
Austerity measures are leading to political changes in Europe, paving the way for a new president in France and fresh elections in Greece. Political turmoil and violence have put a dent into the economies of Tunisia, Egypt, Yemen, Syria and Libya. Even the normally safe investments such as gold and silver have taken a battering in recent weeks.
Yet Saudi Arabia, the Arab world's largest economy, has emerged unscathed and is set to see another year of strong economic growth. You want stock market growth? Head to the Saudi Tadawul, where experts are not ruling out a 25 percent rise during the course of this year. You want GDP growth? Even the pessimists won’t project less than five to six percent. You want low debt? Europe can only look in envy at a country where debt amounts to just seven percent of GDP, compared to 82 percent just nine years ago. As much of the West stumbles into another recession, the only question Saudis are asking is whether 2012 will be as good as 2011.
“It’s very simple. The kingdom conceived about 40 years ago its plan to diversify its economy away from being completely reliant on oil,” says Ihsan Bu Hulaiga, a Saudi economist and former member of the consultative shura council appointed by the king. The only thing that has varied is the pace of that diversification.
“In the early 1980s and 1990s the challenge was the availability of funds now it’s about the availability of capable executives and professional talent that can manage hundreds of projects, the execution of which is crucial to the development of the country,” he says.
The petrochemicals and manufacturing sectors, as exemplified by giants like Saudi Basic Industries Corporation (SABIC), National Industrialisation Co (TASNEE) have grown rapidly, benefitting from the cheap and abundant feedstock in the kingdom. Growth in the country’s manufacturing sector is the largest by value and has expanded by more than ten percent year on year over the past 30 years, largely as a result of Saudi Arabia’s comparative in the area of hydrocarbons. Investment has also made its way to mining and associated infrastructure such as railways in recent years.
With the price of oil projected to average around between $100 and $115 per barrel this year, Saudi Arabia, which has one fifth of the world’s oil reserves, can withstand the challenges brought on by the demands of a growing population that stands at about 28 million and unemployment, which depending on what age bracket one considers ranges between ten and 30 percent. There are nine foreign workers for each Saudi employed in the private sector.
The kingdom’s economy is projected to grow by about six percent this year compared with 6.8 percent in 2011, the fastest since 2003, according to the International Monetary Fund.
“Construction will be the quickest growing sector, followed by telecoms, transport, utilities, power and water,” says Paul Gamble, chief economist and head of research at Jadwa Investment, adding: “The non-oil sector will grow by about five percent, primarily driven by government contracts executed by the private sector and to a lesser degree by high consumer expenditure.”
Saudi Arabia’s 2012 budget projects estimated revenues of SAR702bn ($187.18bn) and expenditures of SAR690bn ($183.98bn). Both revenues and expenditures will exceed the budgeted figures, according to Gamble. The overshoot in revenues will be larger, as the government tends to use fairly conservative oil revenue assumptions. Jadwa forecasts a budget surplus of SAR394bn ($105.05bn) this year (equivalent to 17.1 percent of GDP), based on an oil price assumption of $112 a barrel.
The government has in the past two years earmarked about $500bn as part of a comprehensive effort to address structural issues in the economy, improve education and transportation, tackle unemployment in a country where half the population is under the age of 21, and build hundreds of thousands of homes to meet growing demand in an undersupplied market.
The king has appropriated about SAR250bn ($66.6bn) for housing alone. The consensus of five economists surveyed by Arabian Business is that swelling state coffers will no doubt provide a soft cushion during global economic uncertainty and regional political instability.
And there is no better sign of the current boom than what is happening in the Saudi Tadawul benchmark index.
“You’ve got strong corporate profits, a supportive macroeconomic environment in terms of oil prices and the political will to spend that money and with interest rates where they are at the moment it’s very difficult to make a bearish case for the Saudi market this year,” says Tarek Fadlallah of Nomura.
“With confidence starting to come back into the regional markets, you have people who have got cash, so almost by default because there aren’t many avenues to channel that money it finds its way back into the stock market and so you get a liquidity driven market,” he adds.
The kingdom’s Tadawul Index has risen by as much as 20 percent since the start of the year, and despite a fall last week, is still up thirteen percent since 31 December, having peaked at over 7,900 points in April. Much of the rise is attributed to strong corporate earnings.
Al Rajhi Bank, the kingdom’s largest publicly traded lender, reported an eighteen percent jump in first-quarter profit, while Riyad Bank, the third-largest bank by market value, posted a 22 percent increase in earnings in the first three months of the year and Bank Al Jazira’s profit more than doubled.
Jadwa estimates Tadawul will rise by about 25 percent during 2012, to end the year at 8,050 points depending on developments on global markets, if there’s a deeper recession than currently anticipated in the eurozone or a sharp fall in oil prices.
The outlook on Saudi Arabia is stable according to Standard & Poor’s Ratings Services which affirmed the kingdom’s long- and short-term foreign and local currency sovereign credit ratings at AA-/A-1+ in a report earlier this month.
“The ratings on Saudi Arabia are supported by our view of the government’s very strong external and fiscal positions, which have been built over a number of years,” the rating agency said. “By prudent macroeconomic management, the government has reduced its general government debt, generating additional fiscal space for countercyclical policies,” it said.
Saudi Arabia’s government debt, all of it domestic, has declined to about seven percent of gross domestic product in 2011 from 82 percent in 2003, according to S&P. That’s the lowest in the entire region. Foreign currency assets under management of the Saudi Arabia Monetary Agency have increased to about $570bn in March 2012 — enough to cover 26 months of current account payments — from around $100bn in 2003.
Spending on domestic tourism inside Saudi Arabia increased by 13.5 percent last year to about SAR84.5bn ($22bn) from 2010, the Saudi owned Al Hayat reported citing a report by the Saudi Commission for Tourism and Antiquities. Jobs in the tourism industry increased 6.5 percent to 670,000 last year. Tourism accounts for about 3.1 percent of gross domestic product and for about 7.2 percent in the kingdom’s non-oil sector.
Growth in the kingdom will be mainly supported by oil prices remaining at a high level while output is pushed close to record production, says Philippe Dauba-Pantanacce, senior economist at Standard Chartered Bank.
“After a healthy credit growth in 2011 around ten percent, we expect this figure to slightly moderate this year while topping the anaemic UAE and Kuwaiti credit growth,” Dauba-Pantanacce adds.
Bank loans in Saudi Arabia, where the government is trying to expand small and medium-scale enterprise lending, increased five percent in the fourth quarter of last year from the previous three months to SAR242bn ($64bn).
“Credit concentration risk has been mitigated by high capital requirements, but the small volumes of small- medium-size enterprises and housing finance may have adverse implications for economic growth and the welfare of the population,” the International Monetary Fund said in a report last month.
The extra liquidity in the market could risk increasing inflation and create bubbles that led markets to become overvalued with disproportionate company valuations that eventually caused markets from Riyadh to Dubai to come tumbling down in 2006.
“There are a lot of similarities between 2012 and early 2004 in a sense that you have all these things that are starting to happen, cash on the sidelines, improving profits, GDP growing, interest rates at very low levels,” Fadlallah says. “We don’t seem to have put in place any additional mechanisms to prevent what happened last time. You still can’t short stock in most of the markets, there are still no futures for hedging.”
King Abdullah ordered a crackdown on market manipulation, saying action should be taken if necessary against improper trading. The king said trading rules should be applied to everyone including royals. So far, the exuberance that characterised the investment climate six years ago hasn't returned to the kingdom's market and inflation is forecast to fall to 4.8 percent this year from five percent in 2011, according to the IMF and analysts surveyed by Arabian Business.
“Commodity prices, apart from oil, are falling, the dollar and therefore the riyal is fairly strong and there are few inflationary pressures in the global economy,” Gamble says. “The external factors will offset domestic factors so we are looking at inflation roughly staying where it is.”
The biggest challenge the kingdom faces as it tries to accomplish the behemoth projects is administrative, says Bu Hulaiga.
“The challenge right now is to manage and you need the power of the executive, someone who can deliver”, Bu Hulaiga says.
“Execution is the name of the game. For us here this is our golden opportunity and golden era, we have the money, the youth, potential to grab markets and to expand the economy. We need to execute and can’t afford delays.”