Kingdom becoming key champion of free trade and investment

Saudi Arabia’s inclusion in the G20 reflects its growing stature as a leading global hydrocarbons producer as well as a heavyweight in the strategically important Middle East-North Africa economy.
The dual underpinnings of the Kingdom’s stature are likely to remain in place for a long time.
At the same time, rapid population growth and massive focused investments in economic diversification will further boost the size and significance of the Saudi economy.
Saudi Arabia is a highly open economy given its dependence on oil exports and a wide range of imports. It is therefore a key advocate of free trade and investment in a globalized world.
Talking about the Saudi role in G20, Jarmo T. Kotilaine, a regional analyst, said: “Saudi Arabia can raise issues of importance for the Middle East region. It will continue to play an important role in supplying and stabilizing the global oil markets.”
He said: “Saudi Arabia is heavily integrated in global trade due to its oil exports and heavy reliance on imports. This will make it a key champion of free trade and investment. Its economic resources allow Saudi Arabia to play a role in anti-cyclical stabilization as happened in the post-Lehman Brothers days.”
Most G20 members saw growth pick up momentum in the first half of this year. Kotilaine said: “The situation in Saudi Arabia has been somewhat different due to oil output cuts in the spring. This meant that the oil sector made a negative contribution to growth in the first half of the year. However, the nonoil economy has remained robust throughout at around 4.5 percent.”
Kotilaine said Saudi Arabia is somewhat unusual because of the heavy importance of the oil sector. Also, in population terms, it is a relatively small G20 country, only ahead of Australia.
Saudi Arabia is one of the best performing rapid-growth economies in the G20 Entrepreneurship Barometer 2013, thanks to laudable efforts to reform its overall business environment in recent years.
However, the favorable overall performance masks significant variation across some of the different entrepreneurship pillars.
The country’s strongest performance is within tax and regulation. There’s no doubt that Saudi Arabia provides businesses with an accommodating and streamlined tax regime.
This has been a major selling point in recent years. A number of related schemes have been set up to further help support the growth of new small businesses.
Nevertheless, other aspects of the business environment have made it difficult for a vibrant innovation-led small business sector to emerge. Saudi Arabia’s oil-focused industry has influenced how its economy has evolved. Almost half of GDP is accounted for by oil, which has reduced the impetus to push for high productivity in the nonoil economy.
The government is now working to diversify away from oil.
This will be a gradual process, but in time it should provide the underpinnings for a strengthened culture of entrepreneurship.
After a significantly strong growth in 2012 as a result of high government and consumer spending and pickup in oil output, Saudi Arabia’s GDP is expected to be 4.4 percent in 2013 due to a decline in oil output.
“The nonoil sector is forecasted to grow at a strong rate, supported by buoyant private nonoil activity, high oil revenues and corollary state spending as well as strong consumer spending growth,” Said A. Al Shaikh, group chief economist at the National Commercial Bank, commented.
He said the government is continuing to invest in the infrastructure of the economy as well as education and health care.
The International Monetary Fund (IMF) confirmed that the Kingdom has been one of the best performing G20 economies in recent years and has supported the global economy through its stabilizing role in the global oil market.
The IMF also pointed out the positive outlook of the Saudi economy which grew by 5.1 percent in 2013, benefiting from high oil prices and output, strong private sector growth, and government spending, according to a statement issued by the IMF executive board after it concluded 2013 Article IV Consultation with Saudi Arabia.
Credit growth has remained strong and the banking system is well-capitalized and profitable, with (Basle III Capital Standards) implemented in January 2013. Following an expansionary fiscal stance in 2011, government expenditure growth slowed in 2012 and the nonoil deficit began to narrow.
Consistent with the exchange rate peg, monetary policy settings have remained unchanged.
Inflation has risen over the past year to 3.8 percent in May 2013, driven by higher food prices and housing costs. High oil prices and production led to large fiscal and current account surpluses, and international reserves rose further. Looking ahead, growth is projected to slow down to 4 percent in 2013. Private sector growth is expected to be strong, but oil production is likely to be below 2012 levels while government spending growth may slow.
Inflation is expected to ease toward year-end in line with declining international food prices. With oil prices and production expected to be lower, fiscal and external surpluses, while remaining large, are projected to narrow this year.
Fahad Alturki, head of research, Jadwa Investment, said: “Very high government spending remains the main stimulus to the real economy. Also, we expect oil revenues to remain sufficiently high to maintain and support business and investor confidence.”
While recent push to raise Saudi employment in the private sector will also contribute to higher disposable income leading to demand-pull type of inflation, it is also likely to result in cost-push inflation, though there is little evidence it has done so yet, he said.
“The expected revision to Nitaqat (Saudization initiative) to take into account wages for Saudi nationals working in the private sector will also contribute to the upside risk to domestic prices,” Alturki added.