Saudi Arabia’s economy is forecast to grow 4.2 percent next year after a 3.8 percent expansion this year, driven by heavy government spending, the respected Jadwa Investment bank said yesterday.
With buoyant crude prices and strong demand, the world’s largest supplier of oil will easily fund its budget and turn in a surplus, despite a planned 7 percent hike in spending from this year’s original budget, the Riyadh investment bank said in a report.
While both the state and private sectors will grow, state spending will remain the single most powerful driver of the economy.
“Government investment spending is budgeted at 256 billion riyals (US$68.3 billion) in 2011, equivalent to nearly 15 percent of GDP,” the report said.
While on paper a budget shortfall of 40 billion riyals (US$10.7 billion) is forecast for next year, Saudi budgets are normally highly conservative and most economists predict a surplus, even if the government overshoots its spending target as also expected.
“High spending will not prevent the government from running a budget surplus of around 6 percent of GDP, though it will require an oil price of nearly US$70 per barrel to balance the budget,” Jadwa said.
Global oil prices have held above the US$90 a barrel level over the past week.
Jadwa also forecast Saudi inflation holding at a relatively high 5.3 percent, near the current level, driven first by residential rents, but it added that “there is a risk of a gradual increase in inflation expectations” driven by high government spending and low interest rates.
“We expect interest rates to remain very low and do not anticipate the adoption of new policy measures to tackle rising prices,” Jadwa said, dismissing the idea that Riyadh would adjust the long-standing peg between the riyal and the US dollar.
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