Oil demand will boost Saudi economy

Saudi Arabia's economy faces more stability in 2011 because of surging oil demand from Asia, but economists say the private sector is still in a funk.

Mohamed al Mady, the vice chairman and chief executive of SABIC, says importing countries should follow free-trade rules set by the WTO. Fahad Shadeed / Reuters

Saudi Arabia's economy is on a firm footing for next year, buoyed by strong oil demand from Asia, although the hoped-for private sector rebound is yet to arrive, say economists.

Economic indicators, however, showed confidence was returning, as high inflation is predicted to give way to better economic conditions.

The SABB-HSBC Saudi Arabia Purchasing Managers' Index rose to 62.2 last month, a record high for the kingdom, signalling renewed optimism among business leaders in the non-oil sector.

Recently, activity in the private sector has been sluggish, economists said.

"There's a sense of malaise that still hasn't dissipated," said Dr Jarmo Kotilaine, the chief economist at NCB in Riyadh.

"The private sector recovery has been slow to materialise," he said, due to a "cluster of factors" such as banks' reluctance to lend and currency volatility caused by the recent weakness in the dollar.

Inflation in the kingdom, the highest in the Gulf at 5.5 per cent, has also contributed to sluggish business conditions.

A report from Banque Saudi Fransi, however, said inflation in the kingdom should start to ease next year. "We foresee inflation subsiding in 2011 to 4.7 per cent, against a prior estimate of 5.1 per cent," the report said.

The oil sector is expected to see robust growth as the growing strength of Asian economies boosts demand for crude and increases flows into Saudi coffers, according to the report.

"The kingdom is a key beneficiary of strong oil demand growth from Asian clients, since about 54 per cent of exports in 2009 were destined for Asia, up from 45 per cent just nine years earlier," it said.

On Friday, the price of Brent crude peaked at US$91.12 per barrel, its highest level since October 2008, and analysts said that rise could be sustained into next year.

A report from Goldman Sachs indicated oil demand was expected to surge next year, with prices holding above $100 per barrel.

"With the supply-demand balance in a seasonally adjusted deficit and robust world economic growth expected in 2011 and 2012, we expect OPEC spare capacity will need to return to the market in 2011," the report said.

"As OPEC spare capacity is drawn down, we expect a structural bull market to return to the oil market, with substantially higher prices."

While the Saudi government may be content with higher oil prices boosting budget surpluses, the higher prices also translate into higher food and energy costs.

However, Dr Kotilaine said inflationary pressures may be easing. "We seem to be past the worst in terms of inflation," he said.

"I don't think it'll come down dramatically but we may be looking at a scenario where it is, broadly speaking, stabilising."