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Saudi economy ‘strong enough to ride out recession’

Saudi Arabia: Tuesday, November 25 - 2008 @ 11:02

They are no longer passive participants at such events, with King Abdullah prominent in calling for the International Monetary Fund (IMF) to play a greater role in supervising the financial sectors of developed countries.

He also stated that Saudi Arabia for its part will continue to spend heavily on infrastructure and other projects to minimise the impact of recession on the country’s economy.

Public sector investment projects valued at more than $400bn are expected to go ahead within the next five years.

In spite of the 63% drop in oil prices, Finance Minister Ibrahim Al-Assaf has also emphasised that development projects will be unaffected by the crisis and can be funded by reserves and ongoing oil receipts.

Oil revenue cushion

OPEC members are expected to have earned almost $1 trillion from crude sales in 2008. Saudi Arabia’s budget surplus alone is expected to be at least $150bn this year, vastly bigger than the budgeted figure of $10.6bn.

The IMF, the Institute of International Finance as well as leading banks such as Goldman Sachs and Merrill Lynch have said that emerging markets, particularly within the Middle East, will outperform developed countries next year.

According to Mohsin Khan, the IMF’s Middle East and Central Asia director, Saudi Arabia’s break even oil price is about $49. Fitch Ratings puts Saudi Arabia’s break even point at $54 next year though Citigroup puts the figure higher at $67 a barrel.

Some major projects in the pipeline seem likely to be delayed yet Saudi Arabia has plenty in reserve to sustain most investment at current levels even if petroleum prices continue to fall and flatten out during 2009. A continuing robust performance by the Saudi economy will also be a factor in any global recovery.

Another meeting of the G20 is expected to be held in the first quarter of 2009 by which time President-elect Obama and his new team will be in office and have outlined their response to reviving the US economy. This is likely to involve a much greater liaison and co-operation on an international level than ever before.

Outstanding US debt

Almost a quarter of total US debt totalling some $2.6 trillion is owed to foreign institutions. Another $14bn of US assets is estimated to be in foreign hands. No creditor is likely to take actions that compromise their US holdings.

However, Washington is less in control than it was, which may be reflected in future attitudes towards investments by sovereign wealth funds. Prominent US and European corporations as well as banks are actively seeking to attract Gulf investments which are unlikely to draw as much political antagonism as in the past.

The biggest problem for Saudi Arabia and other GCC states whose currencies are pegged to the dollar is that they have to effectively follow interest rate decisions taken in Washington and which tend to exacerbate inflationary pressures when money supply is increased.

See also:
Foreign Direct Investments in Saudi Arabia up 33%
Saudi Arabia invests SR1.5 trillion to curb inflation

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Tuesday, November 25- 2008 @ 11:02 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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