Oil Price, Interest Rates Main Headwinds for Saudi Economy

by: Peter Cooper

The uncertain outlook for oil prices and a probable rise in interest rates are the main headwinds facing the Saudi economy in 2010.

Last year there was almost no growth in the Saudi economy, according to a new report from Banque Saudi Fransi. The slowdown resulted in a surge in unemployment from 6.2 to 15.2 per cent.

Bad debts from the collapse of the Algosaibi group helped to depress bank lending during the year. Growth in bank lending crashed from an unsustainable 27 per cent in 2008 to just 2.1 per cent in 2009, said Banque Saudi Fransi. Similar rates of bank lending in China in 2009 have led to question marks about the sustainability of economic expansion there.

Bad debts

For 2010 some bad debt issues continue to linger, and the report said that the central bank is more likely to raise interest rates than to lower them in 2010 in order to check a possible surge in inflation.

The Saudi Central Bank’s interest rate policy is largely determined by what happens in the US as its currency is pegged to the US dollar. But as in the US, low base rates have not necessarily boosted lending to business and consumers because banks are rebuilding their balance sheets after the bad debts left over from the boom of the 2000s.

As ever the biggest unknown for Saudi Arabia is the oil price itself which directly and indirectly accounts for the bulk of GDP. Forecasting oil prices is a fool’s errand at the best of times, and it is especially hard right now.

If the world plunges into a double-dip recession then the oil price will go down. We do not yet know whether the hesitant recovery from the depths of 2009 is sustainable or just a function of huge government stimulus packages.

Certainly the global economy has a long way to climb back to where it was before the recession. German GDP, for example, fell a record five per cent last year, and at current rates of growth will take some three to four years just to get back to where it stood previously.

Looking at those figures there is a depression in output that will take some years to recover. Whether you choose to call that a recession, recovery or depression, it is not good news.

Oil prices

Indeed, it would be logical to assume that in this environment some further swings down and up in the oil price might be anticipated as speculative interest waxes and wanes in the sector, and actual demand levels show some real weakness – perhaps if the economic bubble collapses in China, for instance.

The Saudi response is the correct one: a $144 billion public spending plan for 2010, up 13.7 per cent on 2009. This is the largest budget in Saudi history and will fight the headwinds of higher interest rates and possible lower oil prices, even if it means a big deficit to do it.

However, veteran Saudi watchers know that when oil prices fall then government spending is generally trimmed back, so the best of good intentions could also be less than expected if a more rosy global economic climate is not forthcoming.

Disclosure: No positions