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Standard Chartered Predicts Phenomenal Growth in Saudi Arabia

Saudi Arabia : 16 April 2011

Standard Chartered is expecting a boom in Saudi Arabia despite the fact that only around 40 percent of the stimulus package totaling $128 billion will enter the economy in 2011.

Analysts are making revisions to their growth forecasts for Saudi Arabia after gauging the total impact of the over $100 billion stimulus package the Kingdom is committed to.

Standard Chartered stated that the next boom will be in Saudi and expects growth there to reach 6.6 percent this year as crude prices go higher and the revenue from petro continues to flow into the Kingdom economy.

Authorities in Saudi Arabia responded to the political unrest in the region by announcing $28 billion in spending. One month afterward the Kingdom increased that commitment with another $100 billion in spending on housing, employment creation, social programs and infrastructure.

There was nearly US $89.4 billion committed to the housing industry, which is estimated to be around 68 percent of the total commitment package. These levels of spending are welcome news for the kingdom that faces a serious shortage of housing and the need for 2 million more homes by 2015, according to Standard Chartered.

Expectations by the bank state that around $50 billion of the total $128 billion will be put into the economy in 2011. They expect to see education receive $2.3 billion this year, as well as $15.5 billion going to the establishment of government employment, salary raises and bonuses.

The housing will be allocated over a number of years by necessity. Only around $18 billion, of the total $89.6 billion marked for real estate, will enter the economy in 2011.

There will be $2.6 billion in unemployment benefits handed out beginning in November of this year, with the impact of that move showing up in 2012 as opposed to 2011. Only $400 million will be spent on this avenue for 2011, according to Standard Chartered.

Private industry in Saudi will see the benefits in two major ways. Wealth should be higher in the kingdom and more spread out as 60,000 new positions become available and public sector workers see a 15 percent bonus. This injection of wealth will likely boost domestic consumption.

Also, growth in private sector credit will come into its own after staying in the shadow of government lending. The most recent stats show that private sector lending grew by 6.31 percent over last year.

Overall, in 2010 there were 5.6 percent more claims made on private businesses, compared to zero growth seen in 2009. However, the level of credit growth in private businesses is still far below those seen in 2007 (when lending grew 27.1 percent) or 2008 (when lending grew 21.3 percent). With the government investing more into the economy, credit growth is expected to average around 10 percent for 2011, a healthy level according to the bank.

Even with the large stimulus spending, there is still a decent chance for the budget of the Kingdom to post a surplus for 2011.

Brent will experience an average of $111 per barrel according to Standard Chartered and the Saudi government needs to see the average price bring in $106 billion, allowing them to go over their targeted spending by about $50 billion.

There is still a problem, however. Despite what the media is reporting and even though expectations stated that Saudi oil exports would increase in compensation for Libya’s shrunken supply of oil into the market, this might not have happened.

Some early estimates stated that Saudi oil production was up 310,000 barrels each day on average, reaching 8.8 million bpd in the midst of the crisis. However, in the wake of the earthquake, tsunami and resulting nuclear crisis in Japan the demand for oil has been slashed. The Kingdom exports around 1.2 million bpd of oil to Japan, which accounts for around 13.5 percent of total production.

Due to the disasters in Japan Saudi Aramco is suspected to have cut back oil production in the middle of last month, according to a note written by the International Energy Agency this week.

As the price of crude climbs higher across the globe, impacting food prices worldwide, this will result in inflation of about 7 percent for 2011 in the Kingdom, according to Standard Chartered.

Authorities in Saudi are aware that high levels of inflation in food prices were a trigger to successful revolts in Tunisia and then Egypt. Unfortunately the government has little room to wriggle.

New subsidies are one of the ways that authorities could impose measures designed to control the price of food. And higher oil prices do allow Saudi government the opportunity to proceed with these measures. However, increasing the subsidies is equivalent to embarking on more fiscal stimulus, which in turn has an effect on inflation, as stated by the bank.

Other analysts have even more optimistic expectations of Saudi Arabian GDP, such as the International Monetary Fund.

The IMF forecasted that the GDP in Saudi Arabia would increase by 7.5 percent in 2011, which is one of the highest levels of growth within the G20 countries, third only to China and India. This forecast was made in the IMF’s World Economic Outlook.

The banks in the Kingdom are taking a more conservative stance. Banque Saudi Fransi has only recently increased the growth forecast for Saudi’s GDP to reach 5.5 percent.

Jadwa Investments puts their expectations at 5.6 percent, on the opinion that factors outside of the kingdom can still inflict damage.

Jadwa’s chief economist Brad Bourland noted that despite the importance of the royally decreed economic stimulus, tensions in the region continue making it more difficult to restore full confidence levels in private industry. This restoration is essential for the creation of sustainable employment all over the region, according to Bourland.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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