Saudi to bank on record oil windfalls

Saudi Arabia is on track to reap record oil revenues this year, according to a report released by the Kingdom’s Samba bank.

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By  Alicia Buller Published  August 20, 2006

Saudi Arabia is on track to reap record oil revenues this year, according to a report released by the Kingdom’s Samba bank. The forecast estimated that the country is set to take US$203bn in oil export earnings this year, an all-time record, up 25% from last year’s total of US$162bn. Of the estimated US$17bn per month Saudi Arabia earns in oil export revenues, about US$7bn per month is accumulating as foreign assets at the central bank, said the report. Underlying the strength of the oil market is continued global economic growth and demand for crude oil, as well as global concerns that oil production could be disrupted. Barrel prices hit an all-time high this year and hit US$74 per barrel by July 2006. However, Samba bank reported that prices are now expected to average out at US$68 for the year, still well above the US$38 per barrel needed to meet the Saudi government budget’s revenue projection. Saudi oil production is likely to average 9.4 million barrels per day (b/d) in 2006, the same as in 2005. While the Kingdom’s stock market experienced a sharp decline this year, the unprecedented fall is expected to be offset by the strength of the oil market. However, according to the Saudi-based bank, the downturn will still have some implications — such as a likely slowdown in retail sales, business investment, and banking sector earnings growth. The bank reported that the 37 ‘mega-projects’ are currently underway in Saudi Arabia with a total value of US$283bn. “Our macroeconomic forecast is for nominal GDP growth of 20% this year, and real GDP growth of 5.8% The difference is that nominal growth captures the rising price of oil, so we find this to be a better measure of what is actually occurring. The non-oil private sector will grow 8.9% in real terms, the highest growth in 25 years, while Inflation will be under 2%,” the bank forecasted. “The strong oil export earnings will be the main factor behind a likely current account surplus of US$114 bn, the eighth surplus in a row. The trade profile of the Kingdom is healthy.” Even with the country’s predicted spending growth of 20% above 2005 levels, the government is still set to run a surplus this year of an estimated US$67bn. These strong conditions − high oil revenues, robust non-oil growth, low inflation, and growing investment in major projects − are likely to continue, according to the bank's report. Therefore, the challenges to emerge for the Kingdom in the coming years will be those associated with managing growth — keeping inflation under control, ensuring that investment in fixed assets and government spending remain efficient, and keeping surging imports from overtaking exports.

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