ECONOMY: A higher oil price works wonders

21 November 1997
SPECIAL REPORT SAUDI ARABIA

The rise in oil prices over the past two years has done wonders for the Saudi economy, which is expanding again after three years of stagnation from 1993-95. Barring an unexpected collapse in prices, oil revenues should continue to rise in 1998, promising a third year of steady growth.

There will be room for a further boost in government spending in the 1998 budget without any imperative to increase non-oil revenues through higher domestic prices for petrol, airline tickets or the utilities. This should keep a tight lid on inflation while allowing for real gross domestic product (GDP) growth of about 2.5 per cent. A balanced budget is a long- term policy aim, but another deficit is likely in 1998. Economists believe the small current account surplus recorded in 1996 is less likely to be repeated either this year or next.

The economic woes of the Asian economies have not yet impacted on Saudi Arabia, which is exporting more crude oil and petrochemicals eastwards. And against a background of robust demand growth, Saudi officials will bid for an expanded quota when OPEC oil ministers meet in Jakarta in late November.

Oil production has been creeping up, to an average of 8.3 million barrels a day (b/d) in recent months, and Petroleum & Mineral Resources Minister Ali Naimi is pressing for a pro-rata increase in country quotas, raising the OPEC total by nearly 2 million b/d to 27 million b/d. Saudi Arabia will claim a 32 per cent share of the new total, implying a national quota of 8.6 million b/d, up from the ceiling of 8.0 million b/d which has not changed for four years. Any supply disruptions, such as another suspension of Iraq's limited oil exports, could push oil prices up next year - slower economic growth in Asia or the US may dampen demand and drive prices down.

OPEC producers are in a bullish mood and are calculating that the steady growth in global demand for oil will enable them at least to maintain, if not increase, their share of world oil markets at the expense of non- OPEC producers, whose production gains have fallen below expectations for the last two years.

The continuing importance of the state-owned oil sector to the Saudi economy is striking, despite the government's desire to promote the private sector and reduce the reliance on oil and its derivatives. Earnings from oil and petrochemicals almost cover the country's outgoings, but there is little left over to plough into reserves or meet exceptional expenses. And despite the tighter budget management of the last three years, most entities in the state sector - from the regional electricity companies to the national airline - have no cash. Saudi Arabian Airlines has unpaid debts with Riyad Bank and the government has been forced to launch a sovereign loan, its first since the 1991 Gulf war, for $4,330 million to help pay for new aircraft.

Gas is also coming into its own. Not only does it provide the feedstock for Saudi Basic Industries Corporation (Sabic), one of the world's largest petrochemical producers, but there are plans to substitute gas for oil in domestic power generation as well.

Energy-based industries are also the prime attraction for private investors: one of the biggest private investments in 1997 was by the Saudi-Chevron Petrochemical Company, the first petrochemical company to have no direct state participation.

The pricing of feedstock is an issue of increasing importance: prices of ethane and methane will rise by 50 per cent from 1 January, with further increases to follow. Not only does the supplier, Saudi Aramco, need to cover the cost of replacing reserves, but the World Trade Organisation, which Saudi Arabia is intending to join as soon as possible, will insist on the eventual elimination of such subsidies. The huge comparative advantage that Sabic has enjoyed over its international competitors will be reduced as a result. Nevertheless, Sabic managed to boost sales by nearly 20 per cent in the first half of 1997 as a result of capacity additions, although profits rose only 1.5 per cent due to the global glut of basic petrochemicals which has depressed prices.

Several major projects in manufacturing, mining, telecommunications and utilities have been initiated this year and these sectors should show positive growth in 1998, according to Henry Azzam, chief economist at National Commercial Bank. Azzam expects the banks to have another profitable year on the back of rising demand for credit.

The mass expulsion this year of illegal labourers could increase costs in the construction sector. If labour shortages result from the exodus, it could also have a modest impact on domestic inflation, which has been enviably low at less than 1 per cent this year. One positive outcome should be another reduction in expatriate remittances which have been steadily declining in recent years.

Peter Kemp

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