$400bn infrastructure plan over five year period to bolster economy.
Saudi Arabia, the Arab world’s largest economy, is in no rush to raise interest rates and will keep plowing its oil revenue into kick starting growth.
Central bank Governor Muhammad al Jasser said in a Jan 23 interview he’s not planning to raise interest rates because inflation isn’t a concern and demand isn’t strong enough to require higher borrowing costs.
Finance Minister Ibrahim al Assaf told an investors’ conference in Riyadh yesterday that a “continuous stimulus” is needed even as the economy rebounds from last year’s stagnation.
Saudi Arabia’s economy will grow more than 4 percent in 2010 after expanding less than 0.2 percent last year, the finance minister said. Gross domestic product increased 4.3 percent in 2008.
The kingdom, the world’s largest oil exporter, last year announced that it would spend $400 billion on infrastructure over a five year period to bolster the economy, the largest stimulus package in the Group of 20 nations.
The country is allocating almost $70 billion to investments this year, a 16 percent increase on 2009.
Rising oil prices, which have rebounded to around $75 a barrel from less than $35 in February, are also likely to boost growth this year.
Al Assaf said: “Stimulus packages shouldn’t be withdrawn prematurely, nor should they be extended more than required so as not to produce inflationary pressures.”
The Saudi government only managed to avoid recession last year through a large injection of public funds into the economy, said John Sfakianakis, Riyadh based chief economist at Banque Saudi Fransi. It must accelerate its stimulus measures this year, he said.
He said: “2010 will be a recovery year for the Saudi economy, based on high government spending.”
Sfakianakis added: “This is what will keep the engine of the economy going.”
In an interview in his office in Riyadh, Al Jasser said that interest rates would increase only once “conditions show that inflation is either getting out of hand or that demand for credit is exceeding the supply of credit in the economy.”
The Saudi Arabian Monetary Agency last year cut the repurchase rate to 2 percent, the lowest since 2004, and the reverse repurchase rate to 0.25 percent as the global credit crunch led to a slump in oil prices, crimping growth.
Inflation has held around 4 percent in the five months through November after accelerating to as high as 11 percent in July last year.
Interest rates in Saudi Arabia, as well as in the other four Gulf Arab countries which peg their currencies to the US dollar, are likely to remain unchanged until US monetary policy starts to tighten, said Giyas Gokkent, head of research at National Bank of Abu Dhabi.
US interest rates, currently near zero, are unlikely to increase before the end of this year, he said.
Gokkent said:“The priority at the moment is the stimulus of the economy.”
Al Jasser said: "Growth in 2009 was not bad, put aside the oil sector, the rest of the economy continued to grow very comfortably."
He added: "Nonetheless, 2010 should be even better because the fiscal stimulus seems to be still there and in the course of the year the global economic recovery should reduce uncertainty for investors in Saudi Arabia.”
Saudi Arabia’s benchmark Tadawul All Share Index jumped 27 percent in 2009 and gained another 2.6 percent this year. The Bloomberg GCC 200 Index of companies in the six Gulf Cooperation Council states increased 10 percent last year, while the MSCI Emerging Markets Index, a gauge of 22 developing countries, surged 75 percent.
Businesses operating in Saudi Arabia may still struggle to get credit as foreign banks are reluctant to lend and local banks don’t have the resources to finance large projects, Samba, the kingdom’s second largest bank, said in a report on Jan 18.
Bank lending slowed following the financial market turmoil and the default of two Saudi family conglomerates, Ahmad Hamad Algosaibi & Brothers Co. and Saad Group. Eighty lenders, including BNP Paribas SA and Citigroup Inc, are owed at least $15.7 billion, sparking a flurry of litigation.
In spite of the crisis, there was an “absolute increase” in lending last year, said al Jasser, a former executive director for Saudi Arabia at the Washington based International Monetary Fund.
Private sector borrowing rose about 1 percent last year after soaring in the previous three years, he said.
Al Jasser said: “In 2010, as the economy picks up and confidence in the global recovery improves, the private sector will go back to investing more than it did in 2009.”
He added: “Lenders will feel more confident about their clients because they know after the crisis who proved to be more robust.”
The central bank governor said the kingdom will issue its first mortgage law in the next few months, boosting the real estate industry and allowing banks to diversify their balance sheets.