JEDDAH – Saudi Arabia's current account (CA) surplus in 2013 will drop compared to last year because of lower oil export revenues, though the surplus will remain in the double-digit territory, Jadwa Investment in its latest update on the Saudi economy. The Riyadh-based investment firm forecast that the surplus will decline to 14.2 percent of GDP from 23.2 percent of GDP last year. In dollar terms the surplus is expected to fall by 35.7 percent to $105.8 billion down from the all-time high of $164.8 billion recorded in 2012. Imports should grow on the back of healthy domestic demand and are likely to be faster than the expansion of non-oil exports. The invisibles balance, which consists of flows of remittances, incomes and payments and receipts for services, will remain in a large deficit. Balance of payments data is only available for the first quarter and this is subject to revision. It puts the current account surplus at $34 billion, 27.9 percent lower than the level of the first quarter of 2012, owing to much lower oil revenues. Services payments (for such things such as transport, travel financial and communications) slightly decreased owing to lower travel and financial payments. The transfers position worsened slightly owing to a 3 percent year-on-year increase in workers' remittances. More recent data is available on the trade position. Imports over the first six months of the year are 9 percent higher than in January to June of last year. Most categories of imports are up over this period except metals and plant products. Import growth is expected to maintain this positive trend owing to the ongoing infrastructure work and the expansion of the economy. High consumer spending will also boost imports of household goods, vehicles and electronics. Based on production and price data, we think that oil exports averaged $23 billion per month so far this year. Non-oil exports are up by 2 percent year-on-year in the first six months, with petrochemicals contracting by 9 percent. For the whole year, we think oil exports will reach $289.4 billion, 15 percent less than in 2012 owing to lower oil production and prices while non-oil exports should rise only modestly to $51 billion. Therefore, we expect the trade surplus to record $190 billion in 2013 from a record high of $245.6 billion in 2012. Remittances of foreign workers will remain the main source of outflows from the invisibles accounts. The huge amount of construction work means that the number of foreign workers in the Kingdom will remain high despite recent measures to increase the number of nationals working in the private sector. As a result, remittances are on track to record an all-time high of $32 billion in 2013, in our view. The latest data shows that non-Saudi transfers increased by 14 percent year-on-year to $23.1 billion over the first seven months of this year. There will also be higher outflows to foreign companies providing construction and related services. As the economy expands, payments to foreign providers of other services, such as communications, insurance and financial, should also rise. Returns on the government's investment portfolio are the main source of non-trade revenues. We expect little growth in returns this year, as the stock of foreign assets will rise further. The bulk of these assets are invested in foreign sovereign securities, primarily US, and with yields on treasury bonds expected to increase as a result changes in the US monetary policy, investment inflows will pick up toward the end of the year. Inflation is forecast to average 3.8 percent for this year, which is consistent with the five-year average inflation in the Kingdom, Jadwa said. The risk is now on the upside owing to domestic inflationary pressures while external factors remain muted, it added. Despite growth recovery in many of the Kingdom's trading partners, there is still a lot of spare capacity with high unemployment leading to low pressure on inflation. According to the International Monetary Fund, export weighted non-fuel commodity prices are likely to contract by 0.9 percent this year. In addition, a stronger dollar vis-à-vis other trading partner currencies (therefore the riyal) would reduce any external inflationary pressures.
Domestically, the pressures stem from domestic monetary conditions, government spending, rise in disposable income and recent and expected labor market reforms. Broad money supply growth has picked up this year with a year-to-July expansion of 5.8 percent compared with 4.7 percent for the same period last year while the non-oil GDP growth was little changed. Credit to private sector also continued on a solid positive path, increasing by 9 percent year-to-July, with an upward potential given the low interest rate environment, and the healthy growth in demand deposits. The latter which grew by 10.4 percent year-to-July reflects the increase in domestic disposable income. While recent push to raise Saudi employment in the private sector will also contribute to higher disposable income leading to demand-pull type of inflation, it is also likely to result in cost-push inflation, though there is little evidence it has done so yet. The expected revision to Nitaqat (the Saudization initiatives) to take into account wages for Saudi nationals working in the private sector will also contribute to the upside risk to domestic prices. While year-to-date average oil production has so far been in line with Jadwa's forecasts, oil prices recorded a stronger than expected positive trend in the last two months. As a result, Jadwa adjusted its forecasts for Brent crude upward to $108 per barrel (pb) this year, while keeping annual oil production average at 9.6mbpd, 1.7 percent lower than last year. Consequently, Jadwa raised its projections for both the budget and current account surpluses. The price of oil recouped some recent losses and rose to over $106 a barrel Wednesday as traders prepared for an expected reduction in the US Federal Reserve's massive monetary stimulus. By early afternoon in Europe, benchmark oil for October delivery was up 66 cents to $106.08 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.17 to close at $105.42 on Tuesday. Oil fell $1.62 on Monday. – SG
