Oil prices transform Saudi economic outlook

When the Kingdom set its budget for 2002 the assumption was that oil prices would hover between $17 and $19 per barrel for the year, and oil production stay at a 10-year low. That left government expenditure in the red.

However, with Societe Generale now forecasting an average oil price of $25 per barrel for 2002, and Saudi Arabia offering to make good any shortage in world oil supplies due to the Iraqi embargo, the outlook for national GDP is much improved. Add to this the general recovery in the world economy, and a previously estimated $12 billion spending deficit could well be transformed into a surplus.

There is even a chance that the Kingdom might be in a position to repay some of its $168 billion public debt mountain, equivalent to 95% of GDP.

It is against this background that the Saudi stock market has powered to its highest levels since records began in 1985. Investors also like what they are hearing about foreign direct investment, with projects valued at $11.2 billion licensed in the past two years.

Indeed, economic reform is the cry echoing throughout the dusty corridors of the Kingdom's bureaucracy. Even the stock market itself is up for reform, from an inter-bank to a fully public exchange with greater transparency and disclosure. And last week the Saudi Telecoms chief delighted Net surfers with news of big cuts in Internet charges.

By the start of next year the Kingdom will unify its tariff levels with the rest of the GCC, creating a customs union, which will leave the way open to a quick free trade deal with the European Union. Meanwhile, a host of measures from electricity and water tariffs to the widening of foreign investment promise considerable opportunities for the private sector.

In short, a happy coincidence of high oil revenues and economic reform is creating the environment for the biggest boom in Saudi Arabia since the early 1980s.