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Review of international Economy 2007G
The global economy has continued its sustained strong growth in
recent years with output growth recording 5.4% in 2006. However,
adversely affected by the current turbulent financial
conditions, global economic growth is expected to slow down to
5.2% in 2007 and 4.8 percent in 2008.
The largest reduction in growth occurred in the United States
and in countries seriously affected by turbulent financial
conditions resulted from the high risky mortgage market,
particularly Canada, Mexico, and a number of Asian states. In
the United States, growth is projected to remain at 1.9 percent
in 2007, a markdown of almost 1 percentage point below the 2.9
percent rate of 2006, affected by the ongoing difficulties in
the mortgage market, higher energy prices and weaker house
prices. In the Euro area, growth declined to 2.5 percent in
2007, 0.3 percent point lower than in 2006, due to the impact of
the excessively tight monetary policy on internal demand; lagged
effects of Euro appreciation and the ongoing difficulties in the
U.S mortgage market. In Japan, growth declined to 2.0 percent in
2007 and is projected to drop to 1.7 percent in 2008, due to
reduced growth in investments and consumption. In the emerging
markets of China, India, Russia, etc.; and in developing
countries, growth is expected to remain very strong. China’s
economy gained momentum during the year 2007, growing at 111/2
percent. India continued to grow at more than 9.0% and Russia at
almost 8.0 percent. The Middle Eastern countries enjoyed another
strong year, with growth rising from 5.6 percent in 2006 to 5.9
percent in 2007, supported by high oil prices and robust
domestic demand.
Inflation has been contained in the advanced economies, but
rising food and fuel prices have contributed to heightened
pressure in many emerging markets and developing countries. In
the advanced economies, inflation is expected to decline from
2.3 percent in 2006 to 2.1 percent in 2007 and further to 2.0
percent in 2008. In the emerging markets and developing
countries, inflation is projected to increase from 5.1 percent
in 2006 to 5.9 percent in 2007.
Concerning international trade, the volume of world trade in
goods and services, after a remarkable growth rate of 9.2%
registered in 2006, is expected to drop to 6.6 percent in 2007.
As for commodity markets, oil, food and metal prices recorded
higher levels in 2007, as a reflection of strong growth in
demand and tight supplies. According to market prospects, oil
prices are expected to maintain their high levels in 2008, due
to limited production capacities. However, metals and food
prices are expected to remain moderate over the medium term due
to expected improvements in supply conditions and moderation of
demand.
With regard to financial market conditions, global financial
stability has undergone an important test since April 2007.
Credit and market risks have risen and markets have become more
volatile. Credit discipline has deteriorated sharply, notably
the U.S. mortgage and leveraged loan markets, affecting other
credit markets, and leading to disruption in some money markets
and funding difficulties in a number of financial institutions.
The resulting disruption has required an extraordinarily high
volume of liquidity injections by a number of central banks to
facilitate orderly functioning of these markets. The
implications of this period of turbulence will be significant
and far reaching. Private sector regulators will have to take
all necessary measures to modify and strengthen financial
systems accordingly against future adverse economic conditions.
As for the monetary development, the Federal Reserve Bank has
already lowered the Federal Funds rate by 0.50 percentage points
(September 2007) and further reductions are expected during the
coming months. Moreover, a tightening-up of monetary policy is
expected in Europe and Japan. In the emerging markets, a number
of central banks have also provided liquidity to relieve strains
in inter-bank markets.
On the foreign exchange markets, the U.S. dollar has continued
to fall against the Euro, the Japanese Yen and the Chinese
currency as well as the currencies of a number of other emerging
market countries.
KSA Economic Review for the Year 2007G
The Saudi economy was characterized by strong performance during
the year
2007G due to sustained high oil prices and demand, coupled with
continued effective structural and organizational reforms
adopted by the government, contributing to ongoing positive
growth. According to the government budget statement published
by the Ministry of Finance, the Kingdom’s GDP for 2007 is
expected to grow by 7.1% at current prices to reach SR 1,414
billion. However, in terms of fixed prices, the Kingdom’s GDP is
likely to grow by 3.5%. Moreover, preliminary estimates indicate
that public debt volume will drop to around SR 267 billion or
19% of the GDP by the end of the fiscal year 2007G.
Projections suggest that the private sector will continue to
perform strongly at estimated growth rates of 7.6% at current
prices and 5.9% at fixed prices. In addition, its contribution
to the GDP for the current year is estimated at 46.1% at fixed
prices. Furthermore, all economic activities involving the
private sector continued to achieve positive growth results. The
manufacturing sector, with the exception of oil refining, is
estimated to grow by 8.6%; the communications, transport and
storage sectors by 10.6%; electricity, gas and water by 4.4%;
building and construction by 6.9%; retail and wholesale trade,
restaurants and hotels by 6%, and finance, insurance and real
estate services by 4%.
The year witnessed increased inflationary pressures due to
higher government expenditure and private sector prosperity. The
cost of living index for 2007 was 4.1% higher than in 2006G. The
non-oil GDP deflator, the most important indicator for the
calculation of inflation for the whole economy, is expected to
grow by 1.6% in 2007 compared to the previous year’s figure.
According to the preliminary estimates of SAMA, the current
account for the balance of payments is expected to achieve a
surplus of SR 344.4 billion in 2007G by contrast with SR 371
billion in 2006G, i.e., a decrease of 7.2%. On the other hand,
the balance of trade for the year 2007 is expected to achieve a
surplus of SR 555.6 billion, i.e., 1.1% higher than the previous
year, due to the dramatic increase in the Kingdom’s high
commodity and service exports particularly non-oil commodity
exports. Non-oil exports in 2007 are expected to grow by 24.9%
to reach SR 106.8 billion, accounting for 12.4% of the Kingdom’s
total volume of exports.
Against the background of developments in the domestic and
global economies, and in the context of current trends in
financial and monetary developments, the Kingdom’s financial and
monetary policies continue to retain an adequate level of
liquidity to satisfy the requirements of the national economy.
The money supply, in its broad definition, increased in the
fiscal year 2007G by 19.6% compared to a growth rate of 19.3% in
the previous year.
With regard to the banking sector, commercial banks continued
their efforts to consolidate their financial capabilities. In
2007G, their capital and reserves increased by 32.6% to SR 106
billion. In the same period, their total claims on the public
and the private sector increased by 19.7% and total deposits by
21.4%. They also continued their vital role in supporting the
private sector and expanding its economic activities. Total
credit extended by banks to various economic activities in the
private sector increased by 19.7% in 2007G.
A closer look at the details of the sub-sectors reveals that
financing extended to the transportation and communication
sector has increased by 205.3%; the mining sector by 116.2%; the
services sector by 69%; electricity, water and other services by
63.4%; the manufacturing and production sector by 44.6%; the
agriculture and fisheries sector by 27%; the building and
construction sector by 14.7% and the trade sector by 14.3%.
Furthermore, in the general area of financing, the Saudi
Industrial Development Fund continued to support local industry
in all spheres of industrial activity. In the fiscal year 2007G,
SIDF’s loan approvals reached their highest level in any single
year since its inception reaching a total of SR 8,544 million,
36% higher than approvals for the previous year. Moreover, the
Kafalah (SME Loan Guarantee) Program run by the Fund has picked
up substantially with the number of guarantees issued to small
and medium enterprises during the year 2007G totaling 264 at SR
126.5 million, which compares favorably with 51 guarantees at SR
22.1 million in 2006G.
In the investment spheres, the general Saudi Stock Market index
reached 11175 points compared to 7933 at the end of the year
2006G, an increase of 40.87%. A total of 23 new companies have
been enlisted in the market for trading, thus increasing the
number of companies registered in the market to 111 by the end
of the year 2007G. A Council of Ministers’ resolution was issued
for the incorporation of The Saudi Capital Market Corporation
(TADAWUL), and authorized the appointment of its board of
directors, in order to distinguish the legislative, regulatory,
and control responsibilities assumed by the Capital Market
Authority from the executive responsibilities assumed by the
corporation. This is a significant step towards completion of
the constituents of the capital market. Moreover, the Capital
Market Authority continued to draw and issue a set of
regulations and guidelines to organize and develop the market.
During the current fiscal year the Authority has issued “By-laws
for Mergers & Acquisitions” and licensed 37 new companies, thus
bringing the number of companies licensed to date to a total of
78.
In the integration of previous years’ procedures and decisions
aimed at the augmentation of the structure of the national
economy, the regulations for government tenders and procurements
were enacted, and the enforcement of regulations for
time¬sharing in tourist real estates was approved during the
current year. Several other key regulations were approved with a
view to enhancing the investment environment, principally, the
Judiciary System Law and the Grievances Law together with their
enactment mechanisms; Anti-information Crime Law; a law
regulating transport activity for delivery of money, precious
metals and documents of value, and trade-marks law for the GCC
countries. Moreover, the bylaws regulating social development
centers, and the establishment of the Petroleum Studies &
Research Center were approved. The founding of a number of
government agencies and bodies including the National Authority
to Protect Integrity & Combat Corruption; the Saudi Export
Development Authority, and the Public Housing Authority were
also endorsed. The General Organization of Railways is currently
in the process of offering the land bridge and the Makkah –
Madinah line project for public tender.
The positive developments achieved by the Saudi economy in 2007G
were highly regarded by all international economic circles. The
Board of Directors of the International Monetary Fund praised
the Kingdom’s
fiscal policy, and its liberal trading system. It commended the
role of the Kingdom in
bringing about a sustained stability in oil market through
implementing a program to increase oil refinery and oil
production capacity and expansion of gas processing facilities.
This was further augmented by the structural reforms adopted to
enable the non-oil private sector to achieve a strong
large-scale growth. Standard & Poors have raised the Kingdom’s
credit rating from “A+” to “AA-.” Their report asserted that the
strong economic and financial position of the Kingdom will
afford the government the flexibility that is crucial to
managing national economy. As for the investment environment in
the year 2008, the Kingdom was ranked 23rd among 178 states
whose laws and regulations governing the investment environment
were evaluated according to the World Bank.
The Saudi economy evolved and developed positively during the
year 2007G. Progress towards economic reform also accelerated,
contributing to the continuity of improvement of the local
investment environment. This improvement further enhanced the
economic position of the Kingdom as an attractive environment
for foreign investment. International reports acknowledge these
developments and the steadily increasing confidence of major
international investors, resulting in increased direct foreign
investment flows in all sectors of the economy, particularly the
production sector. With the anticipated improvements to the
structure of the local economy, and the expansion of the private
sector, confidence in the future of the Saudi economy will
certainly increase.
Performance of the Kingdom’s Industrial Sector in 2007G:
The non-oil manufacturing sector in the Kingdom achieved
substantial growth, approximately 8.6 % in 2007G. In addition,
the relative contribution of the sector to the country’s non-oil
GDP had increased to 13.6 % by the end of 2007G. Furthermore,
the industrial sector has contributed to a great extent to the
growth of Saudi non-oil exports to international markets with an
increase of 24.9% in 2007G.
Moreover, the latest World Trade Report (2007) issued by the
World Trade Organization (WTO) confirms that the Kingdom has
attained a significant increase in the value of its exports. The
Kingdom progressed 8 ranks in the Global Export Value index in
2006G, by moving from the 20th rank in 2004 to the 12th rank in
2006. This progress can mainly be attributed to the increase in
the volume of industrial exports of the Kingdom: from $ 13.5
billion in 2004 to $ 18.3 billion in 2006, with an annual growth
rate of 1 7.8%.
Also, data provided by the Global Petrochemical Exports Index,
rank the Kingdom in the 14th place among the major
petrochemicals-exporting countries in the world, with exports
valued at $11.1 billion: a global market share of 1% in 2006
compared to 0.7% in the year 2000.
In the context of the general picture of the industrial sector
outlined above, we should consider the performance of some
indicators in this sector. Since the data for 2007G is
unavailable, we will, instead, refer to the data for 2006G.
Figures 1, 2 and 3 show the distribution of the components of
value added and Saudi labor ratio in the main Saudi
manufacturing sectors.
As for the value added indicator, The distribution of the
components of the Saudi manufacturing sector value added in the
year 2006G, indicating that profits accounted for about 38% of
the total manufacturing value added. Wages & salaries accounted
for 31%, depreciation 24%, Interest rates 5% and, finally rents
accounted for about 2%. This distribution pattern highlights the
contribution of the manufacturing sector towards increasing
national income by reaching a higher value added covering wages
and salaries, and, in addition, by contributing towards the
expansion of production capacity.
Figure (2) below presents a more detailed picture of the
distribution of the different components of value added in the
major industrial sectors. Profits with wages and salaries
accounted for above 75% of gross value added in the “Other
Industries” Sector with a share of 82.3%, Metal Fabrication
(81.6%), Building Materials (80.1%) and Paper & Printing
(76.7%). These figures declined to 69.9% in Wooden Products,
69.1% in Food Products, 61.8% in Textiles & Clothes and to 54.8%
in the Chemical Industries. The main reason for this decline is
their technical nature, which is relatively more
capital-intensive, with a higher share of depreciation costs
compared to other industries.
As for the ratio of Saudi labor to total labor in the industrial
sector, this indicator is gaining increasing importance at the
national level. Figure (3) shows the Saudi labor ratio to total
labor in the major industrial sectors during 2006, indicating
that the Chemical Products Sector was ahead of all other
sectors, with a Saudi employment ratio of 37%. Then followed
Metal Fabrication and Building Material Sectors with a Saudi
employment ratio of 25% and 24% respectively. Next came Food
Products, Textiles & Clothes and the Paper and Printing sectors,
with a Saudi labor ratio of 21%, 20% and 19% respectively.
Finally, wooden products and the “other industries” sectors had
a Saudi employment ratio of 17% and 16% respectively. As for the
whole industrial sector, the Saudi labor ratio of 25% is
considered moderate as foreign labor still accounts for the bulk
of the labor force.
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