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Saudi Arabia
Saudi Arabia's nominal Gross Domestic Product (GDP) is estimated to have grown by 12.4 per cent in 2006 to reach $346.9 billion while real GDP is estimated to have grown by 4.2 per cent to $213.3 billion. The nominal GDP over the period 2002-06 grew at the CAGR of 16.5 per cent as the high prices and production levels in 2005-06 kept GDP on a high growth path. However, in 2006, production levels on account of Opec cuts due to declining prices had its effect on the GDP growth as it recorded only 4.2 per cent real GDP growth in 2006 as compared to 6.3 per cent recorded in the previous year.
Oil sector grew by 16 per cent while the private sector grew by 7.9 per cent in nominal terms in 2006. The strong capital expenditure projects that the Saudi government has lined up are expected to add significantly to the GDP growth in the coming years. Fiscal surplus currently witnessed is being invested in infrastructural projects which will further benefit the other sectors of the economy. This will have the effect of broad-basing the economic diversification along with the job creation which is much needed in the burgeoning economy.
According to Ministry of Finance, inflation, as measured by the Consumer Price Index is estimated to have increased by 1.8 per cent in 2006 as against only 0.7 per cent in 2005 while the non-oil GDP deflator has reported a yearly increase of 2.1 per cent in 2006 versus preceding year's 1.14 per cent. Following the rise in the US interest rates, SAMA, the Saudi central bank too raised the interest rates in the country. SAMA continued to adopt policy to support the domestic economic growth and tried to keep exchange rate stable.
Inflation: The Saudi central bank is not concerned about inflation and sees no reason for the government to sell bonds to soak up liquidity in the world's biggest oil exporter. The government has been using windfall oil revenues to pay back debt, cutting debt as proportion of gross domestic product to 28 per cent in December from a peak of 119 per cent in late 1990s. The policy did not threaten efforts to contain inflationary pressure. There is no danger of an increase in inflation because there are other tools to neutralise the impact of settling public debt.
Saudi inflation rose for a second month to 2.96 per cent in May 2007, the latest available figure, nearing the December rate of three per cent, the highest in at least five years. The inflation is not a reason for concern, as there is no inflationary pressure resulting from government spending. Rising inflation in Saudi Arabia and other Gulf states will keep pressure on governments in the region to revalue their dollar-pegged currencies. The Saudi riyal has depreciated more than 24 per cent since the beginning of 2002.
The trade balance is estimated to have recorded a surplus of $147.6bn in 2006, registering an increase of 17.5 per cent. The current account balance increased to $102.7bn in 2006 as compared to $90 billion recorded in the previous year. One thing that emerges out of the picture is the strong growth in the imports which is indicative of the strong economic activity in the country. The current account balance is lower as compared to balance of trade as it includes outflow of funds on account of services and repatriation of funds by expatriate workers.
Saudi Arabia's non-oil exports reached about 8.1 billion Saudi riyals in April this year compared to 7.168 billion in the same month last year, showing an increase of 13 per cent, according to a recent report released by the Ministry of Economy and Planning. The total value of Saudi imports rose 38 per cent to 27.32 billion riyals in April compared to 19.75 billion riyals in April 2006. The Saudi non-oil exports to GCC states in April reached 2.047 billion Saudi riyals compared to 1.66 billion in April 2006 with an increase of 23 per cent.
UAE topped the list of GCC importers of Saudi non-oil products in April, followed by Qatar, Kuwait, Bahrain and Oman respectively. Saudi imports from the GCC states in April, amounted to 1.15 billion riyals compared to 974 million riyals in the same month last year. This indicates an increase of 47 per cent. The UAE Products come first in term of the Saudi imports from the GCC countries, followed by Bahrain, Oman, Kuwait and Qatar.
Statistical report: Meanwhile, the annual statistical report for 2006 released by the Central Department of Statistics of the Ministry of Economy and Planning revealed that the value of the kingdom's non-oil exports increased by 10 per cent to 79.3 billion Saudi riyals compared with 72.1 billion riyals in 2005. During the same year, the kingdom's imports jumped by 11 per cent from 22.2 billion Saudi riyals in 2005 to 24.8 billion riyals in 2006.
Saudi Arabia is likely to reduce average oil output again in 2007, as it seeks to defend an oil price floor of $50/barrel. Economic growth will remain robust in 2007-08, driven by strong government spending, rising foreign investment, high oil prices and an expected pick-up in oil output in 2008. The kingdom will also generate large current-account and fiscal surpluses. Inflation will remain low and there will be no pressure on the Saudi riyal's peg to the US dollar.
United Arab Emirates
The UAE is one of the major economic success stories within the Middle East. Although inflation is a problem, it is expected to improve. The economy is also expected to increase its diversification away from the oil sector. Although the UAE is not as dependent on oil for revenues as other GCC states, it does rely heavily on crude in terms of its budget. There are long-term risks to the country's bid to wean itself off hydrocarbons.
Recently released international statistics point out to extraordinary progress of the UAE economy. These sources include but are not limited to the International Monetary Fund (IMF) plus the Bank for International Settlements. The UAE economy now ranks the second largest economy in the Arab region, larger than that of either Egypt or Algeria. Only the gross domestic product (GDP) of Saudi Arabia outweighs that of the UAE.
It is projected that the UAE's real GDP (adjusted for inflation) would amount to $181 billion in 2007, up from $163 billion in 2006. The achievement could be made on the back of a whopping 8.2 per cent real GDP growth. Still, non-oil GDP should grow by 6.6 per cent. Non-oil GDP growth is uniquely vital in the light of firm petroleum prices. Oil sector is the single largest contributor to UAE's GDP.
The fiscal surplus is expected to reduce from 4.3 per cent of GDP in 2007 to 0.46 per cent of GDP by 2010. Surprisingly, inflation is projected to decline this year and next. As such, consumer price index (CPI) stood at a hefty 11 per cent in 2006 only to drop to just over 6 per cent by 2007 and 4.6 per cent in 2008. This improvement is partly attributed to efforts by Dubai with regards to capping annual rental increase at seven per cent.
Nevertheless, the UAE economy will continue suffering from inflationary pressures due to economic policy of linking the dirham to the dollar. Low value of the dollar versus other major currencies such as euro and yen results in what is known as importing inflation. The US maintains a low value for the dollar in order to make American products cheaper abroad as part of efforts to contain trade deficit, which stood at $818 billion in 2006.
Imported foodstuffs: The weaker dollar, near-peak oil prices, as well as faltering application of the rent cap in the emirate of Abu Dhabi may take their toll on retail prices. The prices of imported foodstuffs are under tremendous pressure and are expected to rise sharply in the near future, according to analysts. With government-owned retail outlets offering the highest rates in the country, the private sector can be tempted to increase prices further, pushing the inflation even higher than forecast. Standard Chartered Bank estimates that inflation will be in the vicinity of 7.3 per cent in 2007.
Thanks to firm oil prices, the country's trade balance is projected to post trade balance in the neighbourhood of $50 billion in each of 2007 and 2008. The petroleum sector accounts for three-quarters of total UAE exports. Still, the UAE holds a substantial amount of foreign exchange reserves. The amount is sufficient to cover imports of more than 6 months. This is a sizable quantity, as the planned monetary union within the Gulf Cooperation Council (GCC) requires member states maintaining reserves equivalent to four months' imports.
The GCC states desire to become a monetary union by the year 2010. Yet, authorities in the UAE are determined to further strengthen the country's economic fortunes as evidenced in two strategic plans uncovered during the year. In April, officials revealed the UAE Government Strategy that spans a three-year period (2007 to 2010). The plan is categorised in six sectors: social development, economic development, government sector development, safety and justice, infrastructure, and rural areas development.
Real GDP growth is forecast to average 6.1% a year in 2007-11, reflecting, in large part, buoyant public and private investment expenditure. Consumer price inflation will fall from its 2006 level, largely because increased housing supply will push down rental costs. The dirham's peg to the US dollar will help to contain imported inflation from 2008 as the dollar stabilises.
