Saudi Arabia's private sector growth is expected to recover to 3.7 percent this year, but will continue lingering below 4.7pc of 2008, prior to the global financial crisis, Credit Agricole's Saudi affiliate has said. The growth in the private sector, which hit a 14-year low of 2.5pc last year, will be driven mainly by state spending and bank lending, Banque Saudi Fransi said in a report. Lending is expected to grow eight pc this year, up from 2.1pc in 2009, but still down from a 27pc rise in 2008. The report says the central bank is more likely to raise interest rates this year to counter a possible surge in inflationary pressures. The government has set spending at SR540 billion ($144bn) this year, up 13.7pc from projected expenditures last year. The private sector accounts for about 46pc of the gross domestic product. “The largest budget in Saudi history is designed to encourage private sector businesses to loosen their purse strings and urge banks, awash with liquidity, to jumpstart lending following a slow 2009,” the report says. The global slowdown coupled with a drop in oil revenues - the domestic economy's backbone - slowed the Saudi economy to the verge of contraction in 2009, likely eking out growth of 0.15pc compared to 4.3 in 2008. Problems were aggravated by multi-billion dollar debt defaults last year by some family-owned firms, which made banks more meticulous on lending and hurt profits after rapid lending growth over the previous six years. As a result, unemployment among the Saudis more than doubled to 15.2pc in 2009 from 6.2 the previous year, the report says. “The expansion of the private sector is set to take a turn for the better along with credit expansion at banks. Our view is that improvements in business activity will be gradual and cautious,” Fransi said. The bank expects the GDP to grow 3.9pc this year. “This year, banks will have little choice than to lend more as they emerge from a period of challenging revenues and an unfavourable low-interest rate environment,” Fransi said. “The private sector's eagerness to invest and grow is intact, albeit at more cautious levels than 2008.” Saudi banks do not face a shortage of liquidity, said Fransi, echoing comments by government officials. “Banks have been parking their cash in large quantities at the central bank and investing in foreign assets,” it said. “If banks want to avoid a repeat of their lacklustre 2009 profit performance, they will have to energise the pace of credit expansion.” Most Saudi banks reported lower earnings during the fourth-quarter and the 2009 period.
