28/08/2010
IMF gives Kingdom thumbs up
Saudi Arabia's economic outlook remains broadly positive as it was well prepared in confronting the global crisis, reflecting lessons learned from the mid-1980s when oil prices collapsed and the country experienced a severe banking crisis, the International Monetary Fund (IMF) said Friday.
The Kingdom's nonoil GDP (gross domestic product) is projected to increase to 4.25 percent in 2010, with continued support from an expansionary fiscal stance and a pick-up in credit.
The report, prepared by the executive board of IMF, said inflation should remain around five percent in 2010, reflecting persistence in rent and food inflation, and an expansionary fiscal and accommodative monetary stance.
Beyond 2010, inflation would gradually decline in line with the expected rise in global interest rates and the gradual exit from the fiscal stimulus.
Inflation fell substantially from its peak in 2008 (11.1 percent) reflecting lower import prices despite the large fiscal stimulus and accommodative monetary conditions.
"Undoubtedly the Saudi economy has remained on solid foundation of sound macroeconomic performance during the worst financial crisis since the 1930s and the IMF's report is a testament. At the core of its stability is: a) SAMA's (Saudi Arabian Monetary Agency's) prudent banking regulation which many central banks should draw important lessons, in terms of capital adequacy and b) the Ministry of Finance’s counter-cyclical fiscal spending which came before most G20 member states," said John Sfakianakis, chief economist at Banque Saudi Fransi.
The inflationary pressures are rightly noted by the IMF and can be addressed by supply measures and not by monetary changes. All in all, the Saudi economy is on the road to verifiable and concrete growth, he added.
Echoing Sfakianakis remarks, Jarmo T. Kotilaine, chief economist of NCB Capital, said the Saudi authorities can take a great deal of comfort and satisfaction in the assessment of the IMF directors. Not only has the Kingdom's economy weathered an extraordinary economic storm with considerable resilience but also successfully continued to forge ahead with its strategic investment priorities. After the crisis, the Saudi economy is on the whole better positioned for further growth than before. Not many of its peers can claim the same.
Another concern with the strong growth record is persistent inflationary pressures. This highlights the urgency of continuing with GCC integration toward the ultimate goal of greater monetary policy autonomy, Kotilaine added.
The IMF report said sizable fiscal stimulus supported economic activity and had positive spillovers as remittances increased by 20 percent to $25 billion. Nonoil growth held up remarkably well at 3.8 percent in 2009, only half-a-percentage-point lower than in 2008 despite global headwinds.
The Kingdom's banking system continued to show resilience by weathering the crisis. Banks remained profitable although profits declined by 10 percent in 2009, owing to an increase in loan-loss provisioning. Despite an increase in 2009, nonperforming loans remained relatively low.
The capital adequacy ratio at 16.5 percent provides a large buffer against adverse shocks. Despite ample liquidity, banking credit to the private sector stabilized in 2009 but this did not significantly constrain growth, owing to alternative sources of financing, the IMF said.
IMF directors considered that monetary policy should continue to carefully balance supporting economic activity and controlling inflation. While the current monetary stance is appropriate, excess liquidity will need to be mopped up in case inflationary pressures emerge.
The directors supported the Kingdom’s decision to maintain the dollar peg that has provided a credible and stable nominal anchor and contributed to macroeconomic stability. They encouraged the authorities to continue developing their technical and operational capacity to conduct a more effective monetary policy, which could be valuable in the context of the planned monetary union
