JEDDAH: The nominal GDP of Saudi Arabia grew by 24.1 percent to SR798.5 billion in H1 2010 from SR643.3 billion in H1 2009, the Central Department for Statistics and Information (CDSI) said in its preliminary data on GDP for the first half. The sharp jump in the growth in the first half is a reflection of the recovery in oil prices and oil production in the Kingdom compared to the low base of H1 2009. Oil sector jumped more than 44 percent whereas growth in the government sector was 13.5 percent during the period. However, growth in the private sector seemed to be sluggish, rising by just 6.5 percent in H1 from the same period last year. Major sub-sectors such as manufacturing excluding oil refining and construction and building grew by 9.2 percent and 7.9 percent, respectively. However, the high level of growth witnessed in H1 2010 is unlikely to be sustained in H2, Al Rajhi Capital said in its economics report for November sent to the Saudi Gazette on Thursday. The report said the high growth was largely aided by the low base effect of H1 2009. The nominal growth in H1 2010 was just 4.3 percent compared to H2 2009. Nonetheless, crude oil production continues to inch up slowly in Saudi Arabia. Crude oil production in the country increased to an average of 8.23mn barrel per day (mbpd) in August compared to 8.21mbpd in July as reported by the Organization of Petroleum Exporting Countries (OPEC). The average per day crude oil production till August in 2010 was 1.5 percent higher than average per day production in the full year 2009. However, “we think OPEC has underestimated crude oil production for Saudi Arabia as reflected by the fact that it estimated average production at 8.05mbpd as against actual production of 8.18mbpd reported by the Saudi Arabia Monetary Agency (SAMA) in its recently released annual report. We expect crude oil production to be higher at 8.38mbpd, an increase of 2.4 percent this year. The monthly crude oil production data shows an upward move in crude production in the country. Moreover, the global economy witnessed a robust recovery in H2 2009 and H1 2010 which helped oil demand to recover,” the report said. The pick up in the non-oil sector is underlined by the strong growth in non-oil exports. Non-oil exports grew by 22 percent year-on-year in June after a 39 percent year-on-year increase in May. Growth in non-oil exports was recorded at 23.3 percent in H1 2010 compared to H1 2009. Moreover, the momentum in recovery is underlined by the fact that non-oil exports grew by 12.1 percent in H1 2010 compared to H2 2009. Based on a pick up in trade and other anecdotal evidence, we expect the growth in manufacturing sector to accelerate to 4 percent in 2010 as against 2.3 percent last year. The recently released annual report from SAMA has estimated the government budget deficit for the year 2009 at SR86 billion compared to an earlier estimate of SR45 billion. The higher deficit is mainly due to upward revision in expenditure reflecting bigger support from the government to the economy. Both revenue and expenditure have overshot the budget estimates. However, expenditure increased at higher rate. Actual oil revenue collected by the government was SR434.4 billion and other revenue was SR75.4 billion resulting in total revenue of SR509.8 billion in the year. Oil revenue was down by a staggering 55.8 percent in 2009 compared to 2008 whereas other revenue also declined by 35.9 percent in the same period. Thus, the decline in total revenue was 53.7 percent. Notwithstanding the sharp decline in revenue, the government increased expenditure by 14.7 percent to SR596 billion in 2009 compared to the actual expenditure of SR520 billion in 2008. The actual expenditure was 25 percent higher than budgeted expenditure of SR475 billion for the year 2009. The remarkable increase was witnessed in the capital expenditure which increased by 37 percent to reach SR179.8 billion. The share of capital expenditure in total expenditure increased to 30.2 percent in 2009 compared to 25.2 percent in the previous year. The rise in capital expenditure can be attributed to the government initiatives taken in order to support the economy during the global recessionary period last year. Al Rajhi Capital report further said the government has budgeted revenue of SR470 billion and expenditure of SR540 billion for the year 2010. Both revenue and expenditure are budgeted lower than the actual figures for 2009. With the oil sector rebounding, we expect that oil revenue will jump this year. “We expect total revenue to jump to SR670 billion in 2010 from actual total revenue of SR510 billion in 2009. Oil revenue is likely to jump to SAR560 billion and other revenue to contribute SR110 billion. Our expectation of a jump in oil revenue is based on the fact that both the oil production and prices are expected to be higher. Thus, we expect a jump of 30 percent in total revenue this year.” The swing in total revenue growth has been larger than that in nominal oil GDP growth rate. For instance, nominal oil GDP increased by 37 percent whereas total revenue growth was 71 percent in 2008. On the other hand, the former declined by 38 percent whereas the latter declined by 54 percent in 2009. “Our view of higher revenue is also supported by the fact that the US Department of Energy expects OPEC income to rise to $731 billion in 2010 from $571 billion in 2009, an increase of 28 percent,” the report added. According to the department's estimates, Saudi Arabia earned $131 billion (SR491 billion) in the first eight months in 2010 compared to $92 billion (SR345 billion) in the same period of 2009, a rise of 42 percent. Strong growth in non-oil revenue is based on our expectation of strong growth in non-oil GDP. Al Rajhi Capital forecast that expenditure growth would be relatively muted this year. The reason for muted growth in expenditure is the cyclical nature of capital expenditure growth. “We expect capital expenditure to grow by 11 percent in 2010 as against a staggering 37 percent in 2009. However, we expect that current expenditure, which has almost doubled in the last decade, will grow by 6 percent as against the 7 percent increase last year.” Based on the new data released by SAMA, Al Rajhi revised upward the estimate of total revenue to SR670 billion. “We continue to believe that the government will have a budget surplus this year which is likely to be around SR30 billion, slightly lower than our earlier expectation.” Inflation declined to 5.9 percent in September compared to 6.1 percent in August. The decline is attributable to deceleration in the food and beverages component and in other services. Food prices growth decelerated to 7.5 percent year-on-year from 8 percent year-on-year whereas other services decelerated to 7.9 percent year-on-year from 8.5 percent year-on-year. Another major component, “renovation, rent fuel and water”, moved up a touch after a continuous decline of ten months. This component increased by 9 percent in September compared to 8.9 percent in the previous month. However, “we expect that downtrend is likely to resume as over-supply in commercial real estate especially office space has been pulling down the rent in the commercial space. However, shortage in residential housing is likely to moderate the decline in overall rental category. We expect the rate of price rise in the sub-index to moderate slightly to 8.5 percent-8 percent towards the end of the current year. The main contributor to the recent acceleration in inflation has been the food and beverages sub-index. The recent surge in the global agriculture price index does suggests that food inflation will maintain the upward pressure on headline inflation. The Dow Jones - UBS agriculture commodities price index has surged by 26 percent year-on-year in September, and jumped by 31 percent over Q3 as a whole. This index is composed of futures contracts on coffee, corn cotton, soybean, soybean oil, sugar and wheat. It reflects the return on fully collateralized future positions. Returning to food inflation, the low base effect of the late last year in the sub-index is also likely to have an effect on headline inflation later this year. Thus, all factors point to higher food inflation in coming months, the report noted.
