By Anil Bhoyrul
Saudi's massive oil revenues could push its account surplus to 15% of GDP this year
So what does the future hold for the KSA economy? The latest briefing from National Bank of Kuwait shows a heavily revised up forecast for Saudi Arabia’s real GDP growth this year from 4.2 percent to 6.9 percent, which would leave Saudi Arabia as the region’s second fastest growing economy. Around half of this revision comes from the hydrocarbon sector, which is now forecast to grow by ten percent compared to the five percent expected before. The oil sector accounts for 23 percent of GDP at 1999 prices.
After stagnating for most of last year, actual crude oil production jumped seven percent in the three months to February 2011. This partly reflects increases in broader OPEC production in response to surging oil prices. But the increase in February also reflects a move to partially compensate for the 1-1.5 million barrels per day (mbpd) drop in Libyan oil output. NBK assumes that further, but more measured, increases in OPEC production are seen throughout the year, with Saudi Arabia — which may account for as much as 80 percent of OPEC’s effective spare capacity — bearing the brunt of those increases.
Non-oil GDP growth in 2011 is also revised up, from four percent to six percent. Key to this is the huge supplementary government spending measures announced by HRH King Abdullah in February and March. These measures — which include new jobs, pay increases and money for housing programmes and the health sector — could be worth $125bn, or 29 percent of 2010 GDP. Of course, the impact on the economy in 2011 will be much smaller than this. Only spending worth ten percent of 2010 GDP is likely to take place this year, and much of this will not directly affect demand. Moreover, some of the money will leak out through higher imports, or higher prices. Nevertheless, it is readily possible to imagine the measures boosting 2011 GDP by two to three percent. This will more than offset any potential drop in sentiment, trade or investment stemming from regional unrest.
Inflation dropped from a peak of 6.1 percent in August 2010 to 4.7 percent by March 2011, thanks largely to a sharp — and unexpected — deceleration in food price inflation. This drop could continue in the short-term.
In its reports, NBK says it sees inflation accelerating towards the end of the year as the impact of the new government spending measures kicks in. On average, it expects the CPI to rise by four to five percent both this year and next.
Despite the massive increase in government spending due this year — perhaps as much as 35 percent — the forecast for the fiscal balance is more or less unchanged from before at thirteen percent of GDP thanks to higher oil prices. Oil revenues could reach a record of more than SAR 1 trillion ($266.65bn). On unchanged oil prices, 2012 could see a similar-sized surplus. Some of the government’s recent spending measures were one-offs, so expenditure may not grow much — if at all — next year.
Strong oil revenues could push the current account surplus to fifteen percent of GDP this year from six percent in 2010. On unchanged oil prices, the surplus could fall to ten percent of GDP next year, with a strong domestic economy keeping import growth high. This could still allow the central bank to add to its near $450bn stock of reserve assets.