Saudi Arabia's Economy Likely to Expand 3.5% This Year, Al-Jasser Says

Saudi Arabia’s economy is expected to grow 3.5 percent this year, central bank Governor Muhammad al-Jasser said, as the Arab world’s largest economy gains momentum from government spending and higher oil prices.

“The role of the state’s fiscal policy during this year and last year has been large,” al-Jasser said in a press conference in Riyadh today. “Its influence on the private sector and other sectors will be good.”

Saudi Arabia, the world’s largest oil supplier, has spurred economic growth with a $400 billion, five-year investment package announced in late 2008. Growth slowed to 0.6 percent in 2009 as the kingdom’s average daily oil output fell 11 percent to 8.2 million barrels a day, according to the central bank’s annual report.

“Government expenditure has been used in a way to support aggregate demand when the private sector took a hit,” Jarmo Kotilaine, chief economist at Jeddah-based NCB Capital, said in a phone interview today. “Last year, we had a sharp decrease in oil prices, and volumes plummeted. That has reversed this year.”

Oil prices fell as low as $33.98 a barrel in February 2009 from a peak of almost $147 a barrel in 2008. Crude for November delivery advanced yesterday $1.31 to $76.49 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 13.

Budget Surplus

Saudi Arabia may report a 40 billion-riyal ($10.7 billion) budget surplus this year, compared with a budget deficit of 70 billion riyals last year, according to Al-Rajhi Capital.

The Saudi “economy has gained traction,” the Riyadh-based unit of Al-Rajhi Bank said in its September economic report received yesterday by e-mail. “Non-oil export growth has been robust.”

The non-oil economy will increase 4.4 percent this year, according to Al-Rajhi. “On the back of rising crude production, we expect the oil sector to grow at 2.5 percent this year against 6.7 percent contraction last year,” the company said in the report.

Saudi Arabia, holder of the world’s largest oil reserves produced 8.29 million barrels of oil in August, according to Bloomberg data.

Inflation

Saudi Arabia’s inflationary pressures are “worrying” following increases in global food prices, though it was “premature” to make conclusions on consumer prices this year, al-Jasser.

Saudi inflation may “moderate” to 5.5 percent by the end of the year, according to the report yesterday by Al-Rajhi Capital. Inflation accelerated for a seventh month to reach 6.1 percent in August.

The kingdom has no plans to change its interest rate policy as liquidity levels are adequate, al-Jasser said. The central bank last year cut the repurchase rate to 2 percent, the lowest since 2004, and the reverse repurchase rate to 0.25 percent.

“Now, the system has ample liquidity,” al-Jasser said. “Since there are no pressures on the system in terms of liquidity, then there has not been any change recently.”

To contact the reporters on this story: Glen Carey in Riyadh at gcarey8@bloomberg.net; Mourad Haroutunian in Riyadh at mharoutunian@bloomberg.net.

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net.

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