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Tue 21 Dec 2010 06:34 PM

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Saudi budget reveals private sector struggles

Analysts question poor growth figures in 2010, 2011 budget to push for bigger private sector role

Saudi budget reveals private sector struggles
Saudi Arabia has struggled to drive growth in its private sector, with revenue from non-oil firms rising by just 0.2 percent in 2010 (Getty Images)

Saudi Arabia’s budget for 2011 reveals a strong emphasis on private sector growth, an area that has not performed as well as expected in 2010.

Preliminary figures show that the non-oil private sector – a key indicator of growth outside the kingdom’s huge hydrocarbons-based economy – had risen by 3.7 percent in 2010, marginally up from the 3.5 percent last year.

“Last year, oil prices were very low, there was a lot of concern about the global economy, and the banks weren’t lending,” Jadwa Investment head of research Paul Gamble told Arabian Business. 

“But in 2010, banks were lending, oil prices are a lot higher, corporate performance is a lot better and consumer spending is higher. Every indicator is better, so the very slight increase in private sector growth was a surprise. I thought the non-oil private sector numbers were disappointing.”

However, Gamble also said that he expected the initial figures to be revised upwards eventually.

Saudi Arabia’s real GDP growth of 3.8 percent has been driven by higher-than-expected oil prices, and massive investment in infrastructure. Earlier this year, the government announced a new five-year plan that envisions around $375bn of infrastructure spending.

That package has buoyed the public sector, helped by higher credit growth to that area.

Part of the problem has been the dearth in private sector lending, caused in part by low interest rates forced by the riyal’s peg to the US dollar.

“Private sector lending has been almost treading water. There’s been a bit of an improvement – it hasn’t been quite so lethargic as 2009 when it actually declined – but even then, the regional credit trends show that the momentum has really been on the public side,” said Jarmo Kotilaine, chief economist at NCB Capital.

“But we’re expecting lending to go up, while banks are expected to have more or less dealt with their challenges with regard to non-performing loans. What really has to happen is that this remarkable and deeply entrenched risk aversion has to dissipate a little bit.”

Low interest rates set by the US Federal Reserve are removing banks’ incentives to engage in private sector lending, Kotilaine said.

Instead, Saudi banks are parking their money with the central bank, or in government bonds, or investing in government projects.

But Banque Saudi Fransi (BSF) said that the 2011 budget proved that the government would reach out for more private sector assistance.

“While the 2010 budget emphasised the state-led approach espoused by the government, in 2011 the impetus will shift to the private sector and the measures the state can take to ensure local and global investors are re-integrated into the development process,” said a BSF research note published on Monday.

“Private sector expertise and financial support for projects in energy, utilities and infrastructure will become the focal point of the state’s approach through new contract awards and public-private partnerships.”