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SR 317.4 billion Surplus for Saudi Arabia


Middle East : 13 May 2012

Source: Arab News

The increase in oil revenues will fuel another year of twin surpluses, with the fiscal and current account balances expected to register 14.3 percent and 31.3 percent to GDP, respectively, says a new report from the National Commercial Bank ( NCB ) unveiled yesterday.

The Kingdom’s real GDP growth is expected to rise by 3.9 percent, largely driven by the vibrant nonoil sector and partially due to the increase in oil production, the report said. With Saudi crude oil prices expected to average around $ 105/bbl this year, it said the fiscal account will be in surplus at 14.3 percent of GDP, a substantial SR 317.4 billion.

The current account surplus is expected to grow further as hydrocarbon exports offset the increase in imports. The report said growth in nonoil sectors, particularly construction, manufacturing and wholesale and retail trade, will also remain robust this year, mainly due to strong private and public investment and consumption spending.

Strengthening of domestic demand is reflected in a rise in private-sector credit and the double-digit growth in merchandise imports. Headline figures for Saudi Arabia will remain buoyant in 2013, based on crude oil price and production maintaining elevated levels.

Meanwhile, inflationary pressures are likely to continue in the Kingdom in the second quarter, the central bank said in a report published on its website.

“The available data points to an expectation of continued inflationary pressure… during the second quarter of 2012,” said a quarterly inflation report issued by the Saudi Arabian Monetary Agency .

It singled out rent and food as two main areas of expected price pressure during the current quarter.

Annual inflation slowed to 5.3 percent in April from 5.4 percent in March, according to figures released by the Central Department of Statistics. Prices rose on the month by 0.2 percent, the department said. In another sign of inflationary pressure, bank lending to the private sector rose 4.7 percent in the first quarter, its largest quarterly jump for more than two years.

It said the growth projections for 2012 and 2013 at 3.5 percent and 4.1 percent, Y/Y respectively, reflect how the global economy has weakened compared to 5.3 percent for 2010.

“Yet, this cloudy outlook might be marginally revised upwards given the recent upbeat figures from the US and the success in restructuring Greek debt, but downside risks remain such as rising energy costs, geopolitical risks in the Middle East, and the lack of real growth drivers in peripheral Europe,” said the NCB report.

Saudi crude oil prices are expected to average around $ 105/bbl in 2012. The fiscal account will be in surplus at 14.3 percent of GDP, a substantial SR317.4 billion.

The current account surplus is expected to rise at around 31.3 percent of GDP, as hydrocarbon exports offset the increase in imports, according to the NCB researchers.

The monetary situation remains in a virtuous cycle with the buoyant broader economic activities, supported by the Saudi Monetary Agency ’s ( SAMA ) policies that enhanced the operating environment for banks, said the report.

It said the favorable economic backdrop has obviously helped SAMA in the previous two years, with no recourse to unconventional monetary tools.

A sustainable level of credit, elevated excess reserves and a range-bound inflation will justify a wait and see strategy by SAMA in the medium-term.

Accordingly, SAMA is expected to maintain the repo and reverse repo rates at 2 percent and 0.25 percent, respectively.

“Nonetheless, we are concerned over the uncertain and uneven global economic outlook. While the global economy is no longer on the edge of the abyss especially after Greece’s historical debt restructuring, yet structural imbalances across peripheral Europe will continue to pose immense sovereign credit risks that can trigger another global meltdown. Additionally, the Iranian standoff remains a key concern. Although a possible full scale war between Iran and the US/Israel is highly unlikely, the inflammatory rhetoric will continue to disrupt oil markets,” the report added.

It said: “Our macroeconomic projections are based on an average crude oil price (Arab Light) of $ 105/bbl and an average daily crude oil production level of 9.4 MMBD (out of which 82 percent is exported) in 2012. The increase in oil revenues will fuel another year of twin surpluses, with the fiscal and current account balances expected to register 14.3 percent and 31.3 percent to GDP, respectively. Real GDP growth is expected to rise by 3.9 percent, largely driven by the vibrant non-oil sector and partially due to the increase in oil production. Growth in nonoil sectors, particularly construction, manufacturing and wholesale and retail trade, will also remain robust this year, mainly due to strong private and public investment and consumption spending. Strengthening of domestic demand is reflected in a rise in private-sector credit and the double-digit growth in merchandise imports. Headline figures for Saudi Arabia will remain buoyant in 2013, based on crude oil price and production maintaining elevated levels. It should be noted, however, that risks to our crude oil prices and production forecasts remain on the high-side, particularly if geopolitical tensions associated with the Iranian standoff escalate further going forward.”

The report pointed out that risks to sustainable global economic growth increased since the third quarter of last year, with growth forecasts for 2012 and 2013 revised downwards.

The growth projections for 2012 and 2013 at 3.5 percent and 4.1 percent, tear-on-year respectively, reflect how the global economy has weakened compared to 5.3 percent for 2010, according to the IMF. In fact, the extent of the revisions by the IMF since the beginning of the year in its World Economic Outlook (WEO) reports, albeit a minor upward revision in April, was substantial, slashing 0.5 percent from the world’s real GDP in 2012 and 2013, respectively.

The advanced economies continue to weigh heavily on the global economy, with their economies teetering on the edge of a new recession and elevated sovereign credit risks.

Surprisingly, however, emerging-markets’ growth which had offset the impact of Europe’s debt crisis since 2008 will exhibit moderation on the back of weakening external demand, with the IMF forecasting 2012 global trade growth of 4.0 percent, well below 12.9 percent and 5.8 percent registered in 2010 and 2011, respectively.

In 2011, the developing economies grew by an estimated 6.2 percent and are expected to register 5.7 percent Y/Y and 6.0 percent Y/Y for 2012 and 2013, respectively.

Meanwhile, advanced economies have considerably lagged behind, posting an estimated 1.6 percent growth for 2011 and an expected 1.4 percent and 2.0 percent for this year and next.

The cloudy outlook might be marginally revised upwards for the global economy given the recent upbeat figures from the US and the success in restructuring Greek debt.

However, downside risks such as rising energy costs, geopolitical risks in the Middle East, and the lack of real growth drivers in peripheral Europe will remain key themes in 2012.

The report said commodities had registered the first annual drop in three years on concerns the sovereign-debt crisis in Europe and a moderating Chinese economy may undermine global growth.

After peaking in April 2011 to a three year high, commodities nosedived and declined by more than the 20 percent threshold of a bear market, thus, S&P Goldman Sachs Commodity Index of 24 commodities and Reuters/Jefferies CRB Index of 19 commodities lost around 1.2 percent and 8.3 percent in 2011.

The reversal in fortunes for major commodity indices in a relatively short period of time reflected the escalating fears emanating from Greece’s debt crisis and China’s economic slowdown, which were seen as the main downside drivers on demand for raw materials.

Accordingly, industrial metals were the worst performers, plunging by 22 percent last year, as measured by the London Metal Exchange, with platinum and palladium falling by 21 percent and 18 percent, respectively. Interestingly, copper that is viewed as an indicator of the status of business activity given its use in the automobile and construction sectors fell by around 21 percent, the first decline since 2008.

Additionally, agriculture commodities fell by around 14.9 percent after a record increase of 44.5 percent in 2010 as slowing global economic growth, higher inventories, and normal weather conditions depressed prices.

On the contrary, gold and West Texas Intermediate Oil limited commodity losses, rising by around 10 percent and 8.2 percent, respectively, supported by the global economic uncertainties and the geopolitical tensions that erupted in the Middle East.

On the investment front, risk aversion was apparent from the reduced net inflows to commodity-related exchange-traded products that totaled $ 10 billion, a meager figure compared to around $ 60 billion in 2010.

Looking forward into 2012, commodities might recover part of the losses incurred last year, especially that the developing economies in general and monetary policy makers in specific have reversed course of late as risks to growth take precedence over inflationary pressures.

The report added: “The Saudi economy had an exceptional performance in 2011, yet we project real GDP to moderate to 3.9 percent in 2012.

The Kingdom’s nominal GDP crossed the 20 percent threshold for the first time since 2008, expanding 28 percent to SR 2.16 trillion, thus, boosting per capita income to an estimated SR76,000, the highest on record. Meanwhile, real GDP grew by 6.8 percent compared to 4.6 percent in 2010. This sharp expansion in nominal and real terms was driven by the surge in oil prices, higher crude production, robust domestic demand, and prudent macroeconomic policies. The nonoil private sector, in particular, was stimulated by the series of royal decrees announced in Q1 2011, amounting to around SR 400 billion in supplementary spending, with an estimated SR 110 billion to have been spent in 2011. Going forward, we project real GDP growth of 3.9 percent for 2012 due mainly to base effects, including the slower pace of increase in Saudi oil production, and the fading-out of one time transfers estimated at around SR 94 billion, representing around 4.3 percent of 2011’s GDP. A tightly balanced global oil markets still remains our baseline scenario for the near term, which will ensure that oil prices remain high.”

The report said that contribution of the oil sector to the Kingdom’s economic growth will remain positive, albeit modest compared to last year.

Even though the European sovereign debt crisis intensified in the second half of 2011, the geopolitical unrest that impacted the Middle East and continues to do so, supported the upside trajectory of crude.

As a result, the Arabian light oil prices averaged $108/bbl in 2011, a 39 percent increase over 2010 average levels.

Furthermore, the war conflict in Libya that escalated in February 2011 enabled the Kingdom as a swing producer to increase its daily production to offset the shortage in supply, with Saudi oil output rising by 13.3 percent in 2011 to average 9.25 MMBD.

In 2012, Saudi Arabia continues to benefit from this ensuing positive oil price dynamics that propelled the benchmark Arabian light to a three year high of $ 127.5/bbl in March and to an average of around $ 118.5/bbl year to date.

On the production side, the Kingdom maintains elevated levels of production that have not been witnessed since 1980s due to various supply disruptions pertaining to non-OPEC members and Iran’s crude exports.

As mentioned earlier, the non-Iranian troubles, from the pipeline dispute between Sudan and South Sudan to outages in the North Sea, have knocked an estimated 700,000 b/d off global supply while the EU and US sanctions are expected to reduce Iranian exports by an additional 0.5-1 MMBD.

In spearheading the first new output agreement since 2008 for OPEC countries back in December that increased the quota from 24.84 to 30 MMBD of production; the Kingdom had shown adamancy to keep a leash on oil prices by maintaining current levels of production.

“Thus, we expect Saudi oil production to average 9.4 MMBD in 2012, yet marginally higher by 1.6 percent than the output of 2011,” said the report.

“Additionally, with our forecast of $ 105/bbl for the average Arabian light spot prices, we project revenues to register SR1,006 billion, the second highest on record,” it added.

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