Responding to international crisis: researched and written by international economic analyst Moin Siddiqi.

Author:Siddiqi, Moin

The oil-rich Kingdom of Saudi Arabia, amid a bleak global outlook is taking determined steps to defeat the downturn. Whilst not immune from the OECD-wide recession and waning oil prices, the fallout is less severe than elsewhere because the state continues to invest heavily in an infrastructural programme to support domestic demand and achieve greater diversification. The future, however, will involve serious policy challenges in terms of providing new jobs and basic services to a booming population--forecast to reach 33m by 2020.

Saudi Arabia has enjoyed a period of stellar growth, fuelled by healthy inflows of petrodollars, buoyant private sector activity and infrastructure spending, as well as prudent macropolicies, over recent years. This has provided a platform for the development of a vibrant, diversified economy and increased upstream investments, essential for a stable global energy market. The Riyadh-based Saudi British Bank (SABB) notes: "The Kingdom stands as the most unscathed member of the Group of 20 major economies." True, Saudi Arabia like China is proving resilient by maintaining spending and imports, thereby acting as a stabilising force during the downturn affecting all major commodity exporters.

Fortunately, direct financial channels of contagion are limited, thanks to low external debt, at 10% of GDP in 2008, and a strong capitalised/profitable banking system with good provisioning practice that does not rely on external funding. The risk of capital outflows is remote since foreign portfolio investment so far is small. Automatic stabilisers, such as welfare payments and concessional loans to low-income citizens, as well as support for housing and aid to small and medium-sized enterprises (SMEs) will help cushion the impact of slowdown.

Real GDP growth is forecast to slow sharply to 1-2% before picking up again in 2010. But this should be seen within the context of a five-year trend. Nominal GDP swelled twofold between 2004 and 2008, according to the International Monetary Fund (IMF), buoyed by oil windfalls, the 'twin surpluses' [national budget and external account] that reached record highs, despite increased imports and public spending. The US Energy Information Administration estimated Saudi oil revenues at $287bn in 2008, up from S194bn the previous year.

The fiscal probity observed in the boom period and better policy frameworks generally are helping to ride out the storm. A large chunk of windfalls was used to build up foreign assets--currently totalling some $500bn--and buy back public debt, which stands at a mere 10% of GDP, compared with over 100% of GDP by end-1999. This year, fiscal laxity and dwindling oil receipts will push government finances into a deficit of SR65bn, for the first time since 2002, as revenues plunge from a record SR1.1 trillion in 2008 to SR410bn. There remains the probability of a 'balanced budget' if oil prices recover during the second half of the year to average $55 per barrel. It is important to note that unlike Mexico, Hungary and Pakistan, among others, the risk of a balance of payments crisis or currency devaluation is negligible. We should expect a return to 'twin surpluses' by 2010-11.

The Saudi Arabian Monetary Agency (SAMA, the central bank) has remained supportive of private businesses by cutting interest rates from 4% to 2% since November 2008 and offering extra credit to local firms. The bank also reduced the reserve requirement on bank deposits from 10% to 7% (they had been at 13% in last...

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