Saudi's private sector is booming

Saudi Arabia's private sector is booming. For a nation with such a poor international reputation for its private sector, Saudi companies have been certainly producing some world class results.

SABIC, Saudi Arabia's largest company by market capitalisation, today posted a 133% increase in nine month profits over the same period last year to $1.3bn. SABIC owns and operates 16 complexes with international firms producing petrochemicals, plastics, fertilisers and
steel.

SABIC is not alone. Savola, the largest Saudi wholesaler of foodstuffs, reported that nine month profits were up 41% y/y. Eastern Province
Cement showed a 29% increase, Saudi Industrial Exports 44%.

The banking sector has been reporting rises in profits of between 10-40%. All of which were outstripped by Saudi Arabia Fertilisers, which saw a jump in profits of 240% over the same period.

Judging by the performance of the stock market the profits have already been priced in. Since September the TASI all share index has fallen by 12%. That said, the index is still up 60% year to date.

Despite the market's muted reaction to the profit numbers it is interesting is to speculate why company profitability has been outperforming. The
causes may have longer term economic implications.

From a macro perspective the profit numbers confirm that the Saudi economy is on track for a record year. Following two years of lacklustre
growth, and despite the considerable inherent structural imbalances, we estimate that the economy is set to expand by as much as 5% (real
terms) this year, thanks to a combination of stronger oil revenues, low interest rates and increased liquidity.

Domestic buoyancy has undoubtedly supported private sector profits but most companies are also citing a pick up in external sales as a
significant boost. The improved global backdrop will have helped, particularly the recovery in the US and Asia, Saudi's key export markets.

More important will have been the boost to Saudi Arabia's competitiveness thanks to the fall in the US dollar and therefore, through the peg, the Saudi riyal. The US dollar has lost almost 20% of
its value against its major trading partners and we expect a further 20% fall over the next eighteen months. This will make Saudi Arabia's
exports even more competitive and should support future sales.

Iraq may also be playing an import role. Saudi Arabia shares a border with Iraq and anecdotal evidence suggests that the streets of Baghdad
are awash with imports from the Kingdom. Iraq, with a population of 20m, is potentially a huge market for Saudi companies.

The new Iraqi regime has dismantled the old tariffs and restrictions on imports and imposed a flat tax of just 5%.

Given its large reconstruction needs and the open nature of the market, Iraq could become the most important market for Saudi companies going forward.

The profits of Saudi Arabia's companies underline the current strength of the economy, despite the considerable international and internal political pressures. The question is whether the numbers, and the economy's performance, reflect cyclical (high oil prices, low interest rates) or structural factors (Iraq's rehabilitation, the US dollar's decline, Asia).

The former means that this year's profits will be the exception and revenues will decline next year as the economy slows in line with lower oil prices. The latter would be more encouraging, suggesting some success in Saudi Arabia's attempts to reduce its reliance on oil and diversify.

Given the significant medium term economic challenges, and in particular the need to create productive jobs for Saudi's growing labour force, policy makers will be hoping that more structural factors are at work. It is too early to draw firm conclusions, but 2003 is, at least, a positive start.