By Edward Attwood
The numbers look good on paper, but Saudi Arabia cannot afford to play the role of Croesus for ever
For King Abdullah, who is currently convalescing after his back operation in New York, there is much in Saudi Arabia’s performance in 2010 about which to be satisfied. Higher-than-expected surplus and lower public debt? Check. Strong and steady real GDP growth? Check. An oil price that some analysts believe is heading towards triple digits? Check.
But behind those headline figures, the king will have some concerns about the poor performance of the non-oil private sector, which improved by a paltry 0.2 percent during the course of the year, despite those higher oil prices, more consumer spending, higher rates of lending and more favourable commodity prices. Data provided by Banque Saudi Fransi shows that the private sector contributed 47.8 percent of real GDP in 2010, a sliver less than the previous year.
The conundrum that the Saudi economists find themselves in is that it’s extraordinarily tough to boost the private sector without having the tools to encourage banks to lend. With Ben Bernanke calling the shots in Washington, interest rates are likely to remain low throughout 2011. There is no incentive for banks to open their cheque books when the private sector comes calling. Instead, and in their droves, Saudi banks have largely been depositing their assets elsewhere. Not that there has been that much interest from the private sector to borrow anyway.
It’s possible that, despite a gradual increase in lending, 2011 will therefore see further speculation on depegging the riyal from the dollar, but speculation is all that will occur. Just because the appetite is there to take interest rates into their own hands doesn’t mean that Saudi authorities have the market infrastructure to make it happen.
However, what the Saudi government can do is welcome more private sector participation in some of its multi-billion-dollar projects. On the infrastructure side, the allocation for transport and telecoms has risen by five percent for 2011, with four new airports and 6,600 kilometres of roads being planned.
The budget for water, agriculture and infrastructure has also risen, this time by over 10 percent, while that for health and social affairs increased by over 12 percent. There is a lot of potential here for the private sector if the government grits its teeth and chooses to take the public private partnership (PPP) route.
Admittedly, it’s not been a fantastically successful option in the past, what with the collapse of the $6bn Ras Al Zour independent water and power project in 2009. The government tried a similar approach on the financing of the Haramain high-speed rail link, but the complexity of the proposed deals meant that the Saudis found it easier to finance the network itself. More encouragingly, however, the head of the Saudi Electricity Company said this week that the Saudi-Egypt power grid connection contract could be awarded as a PPP.
The privatisation of the kingdom’s assets has also been a long time in the making. Although plans for Saudi Arabian Airlines have been in the pipeline for years, the process is excruciatingly slow – not to mention costly. The airline has been for some time by far the largest recipient of budgetary allocations to semi-autonomous institutions. In 2011, Saudi Arabia will shell out an eye-watering $5.6bn for its flag-carrier, a seven percent increase on this year. Officials should be asking themselves whether that money could not be better spent elsewhere.
Even Saudi Arabia can’t afford to stimulate its economy artificially forever. The biggest Saudi budget in history may look great on paper, but the government will undoubtedly be concerned that it is not getting the best value out of the billions it is spending to keep the country afloat.
I would just like to correct one misunderstanding regarding Saudi Arabian Airlines; Saudia does not receive any actual money from the government through the budget, what happens is that Saudia makes its budget, gets it approved and then Saudia takes care of making the income that meets the budget without any government hand outs.