Morgan Stanley positive on Saudi Arabia economy

In the report, 'Saudi Arabia Economics: Unlocking the Kingdom's Potential', Morgan Stanley's senior GCC economist, Mohamed Jaber, believes that the country's real output will recover in 2010, catalyzed by higher oil production levels; stronger domestic demand on the back of the government's expansionary fiscal and monetary stance; and a gradual resumption of credit growth. As a result, Morgan Stanley expects Saudi Arabia's total output to grow by 3.6% in 2010 and 4.7% in 2011.

"The near-term economic outlook for Saudi Arabia is positive. In addition to strong growth in real overall output, we also project headline inflation to continue trending downward as the tightness in the housing market is gradually eased over time. Based on our assumption of higher oil prices over the near term, the country's fiscal and external balances are likely to improve,"

says Mr. Jaber.

Mr. Jaber believes that the positive outlook is partly attributable to the Saudi Arabian government's response to the global financial crisis, "The Saudi authorities have been proactive in their monetary response to the global economic downturn and have implemented a number of measures designed to ease the liquidity constraints on the banking system and support the flow of domestic credit. As a result, domestic liquidity has continued to improve, as reflected by the drop in the three month Saudi interbank rate."

Despite these positive views, the report also suggests that there are significant challenges facing the Saudi economy in the near future, including a need to diversify away from a continued dependence on a volatile oil sector and a relatively large public sector for growth.

According to the report, another challenge to be faced is the need to address rising unemployment levels if the country is to achieve its full economic potential. Saudi Arabia possesses a young population, with close to 48% of Saudi nationals under the age of 20. Mr. Jaber believes that pressures in the labour market, where unemployment currently stands at around 10%, may rise further as an estimated 500,000 - 600,000 new graduates join the workforce over the next five years

"The issues of population growth and structural unemployment, are central to the Saudi growth story and we expect them to be of primary concern to policymakers over the medium-to-long term," according to Mr. Jaber.

However, Mr. Jaber is confident that the economic outlook for Saudi Arabia is bright, provided the authorities continue with their wide-ranging structural reform program aimed at fostering sustainable long-term economic growth and strengthening the role of the private sector.

"The authorities' efforts on structural reform have been largely successful, but more is still needed. The wide-ranging structural reform agenda that was started in 1999 has already succeeded in raising Saudi Arabia's international competitiveness and attracting foreign direct investment of around $93bn over 2005-08. Persisting along this path will be critical if Saudi Arabia it to achieve its impressive, long-term economic potential, in our view," added Mr. Jaber.

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