RIYADH (AFP) – Saudi Arabia’s economy is forecast to grow 4.2 percent in 2011 after a 3.8 percent expansion in 2010, driven by heavy government spending, the respected Jadwa Investment bank said on Sunday.
With buoyant crude prices and strong demand, the world’s largest supplier of oil will easily fund its budget and turn in a surplus, despite a planned seven percent hike in spending from 2010’s original budget, the Riyadh investment bank said in a report.
And while both the state and private sectors will grow, state spending will remain the most powerful driver of the economy.
“Government investment spending is budgeted at 256 billion riyals (68.3 billion dollars) in 2011, equivalent to nearly 15 percent of GDP,” the report said.
While on paper a budget shortfall of 40 billion riyals (10.7 billion dollars) is forecast for 2011, Saudi budgets are normally highly conservative and most economists predict a surplus, even if the government overshoots its spending target as also expected.
“High spending will not prevent the government from running a budget surplus of around six percent of GDP, though it will require an oil price of nearly 70 dollars per barrel to balance the budget,” Jadwa said.
Oil prices on global markets have held above the US 90-dollars-a-barrel level in the past week.
Jadwa also forecast Saudi inflation holding at a relatively high 5.3 percent, near the current level, driven first by residential rents.
But it added that “there is a risk of a gradual increase in inflation expectations” driven by high government spending and low interest rates.
“We expect interest rates to remain very low and do not anticipate the adoption of new policy measures to tackle rising prices,” Jadwa said, dismissing the thought that Riyadh could adjust the long-standing peg between the riyal and the US dollar.