Saudi economic outlook positive

The top economic trends shaping the landscape of the Saudi economy in 2003, most of which we think are likely to carry over into 2004, are:

• Firm oil prices and high Saudi oil production, resulting in higher than budgeted oil revenues and good government fiscal performance.

• The significant depreciation of the dollar, and thus, the Saudi Riyal, raising the costs of non-dollar denominated imports into the Kingdom.

• The beginning of a global economic recovery, which should underpin strong growth in oil demand.

• Signs of a recovering Japan, and strong growth in China along with the latter's increasing importance to Saudi Arabia as a trade partner and oil consumer.

• Global inflation in commodity prices, which benefit Saudi Arabia's exports (oil and petrochemicals), but low inflation in finished goods, which benefits Saudi Arabia with low and stable import prices.

• Low interest rates to accommodate global growth, which keeps rates low in Saudi Arabia, meaning low borrowing costs for the government, businesses, and individuals.

• Strong performance of the Saudi stock market.

With the exception of the depreciation of the dollar, the other major trends have been strongly positive for the Saudi economy, reflected in the numbers for 2003 economic performance: Real GDP growth of 6.4 percent, a government budget surplus of $12 billion, oil revenues up $20 billion over 2002, a current account surplus of $27 billion, central bank foreign assets up by $14.9 billion to total $56.7 billion, inflation of 0.5 percent, and a rise in the stock market of 76 percent.

Samba's "heat map" of the Saudi economy, a graphic we produce using 23 economic indicators to gauge the overall health of the Saudi economy, shows the economy to be as strong as it has been in many years.

These strong conditions appear likely to continue into 2004. The key difference will be a likely overall decline in average oil production for Saudi Arabia, but the production cuts have successfully aimed to keep prices firm, so Saudi Arabia will still enjoy a year of strong oil revenues in 2004.

With two Opec oil production cuts in the second half of 2003, a production decline from average 2003 levels has already begun, but the strength of the global recovery and strong demand growth, especially from manufacturing-intensive Asia where Saudi Arabia exports nearly half of its crude oil, may alleviate much need for further cuts in 2004.

Oil prices ended the year at $30.71 (Opec Basket), above the organization's target price range of $22-28 per barrel.

Our initial forecasts for 2004 are for a small decline in GDP growth, due entirely to oil production declines not fully offset by higher government and private sector growth, 1.5 percent inflation, average oil prices for the year of $25 (average price for Saudi oil), a government budget roughly in balance, and a current account surplus of $7.5 billion.