Saudi Arabia faces recession as oil prices decline

Nov 20, 2001 01:00 AM

Saudi Arabia, facing rising unemployment and a population boom, may slip into recession next year because of a drop in oil prices and output, economists said. The world's largest oil exporter will probably trim average oil production to 7.5 mm bpd in 2002, from about 8 mm barrels this year, in a bid to prop up prices, said Brad Bourland, chief economist at Saudi American Bank. Oil represents 40 % of the $ 232 bn economy and 90 % of exports.
"We expect the decline in production will not be offset by growth in the non-oil sector," Bourland said, adding that the economy could contract by as much as 1 % in 2002. Saudi crude prices will slide to $ 18 a barrel from $ 22 this year, further slashing government revenue, he said.

Even last year, when oil prices averaged a 15-year high near $ 27 a barrel, economic growth reached only 4.5 %, below the 6 % needed to absorb the more than 100,000 men who enter the labour force each year, according to Saudi American Bank. The economy has grown at an averageof 1 % a year for a decade.
Economic decline -- it would be Saudi Arabia's sixth recession in nearly 20 years -- would only add to the 15 % unemployment rate and put further pressure on the government of the ruling al-Saud family to sell off state assets and introduce more competition into the economy, analysts said.
Crude oil prices are 46 % lower than at this time last year and have fallen 18 % since Nov. 9. Prices tumbled after OPEC refused to cut daily output by 1.5 mm barrels unless such non-OPEC nations as Russia also curtail shipments.

For the moment, the government, which generates about 75 % of its revenue from oil exports, can withstand the decline in prices because it can borrow more money to cover a growing budget deficit, economists said. "I think the government has room to manoeuvre," said Khan Zahed, chief economist at Saudi Arabia's third-largest bank, Riyadh Bank. "Interest rates are very low at the moment, so it can afford to borrow more, particularly as it paid back some of its debt last year."
Most Saudis work for the government or for such quasi- government bodies as Saudi Basic Industries, the Middle East's largest petrochemicals company. Now, the government is no longer taking on new hires except in education, Zahed said. Government debt is already equal to more than 100 % of gross domestic product.

Of more than 100,000 school-leavers and graduates coming onto the job market each year, only a quarter are finding work, Bourland said. More than 350,000 young Saudis are jobless. "There is a problem of skills and expectations," said Turki al-Saudairi, editor-in-chief of al-Riyadh newspaper. "Saudis expect more money than expatriates and don't necessarily have the skills to do the job."
At 3.5 % a year, Saudi Arabia's population growth rate is one of the highest in the world. With almost 60 % of Saudis under the age of 19, the population is also one of the youngest. The booming population and slow growth caused GDP per capita to fall to $ 8,000 last year from $ 28,600 in 1981, according to a US State Department report.

The government is opening its natural gas, power and telecommunications industries to outside investment to introduce more competition into the economy and boost growth. Crown Prince Abdullah bin Abdul Aziz al-Saud signed an agreement with ExxonMobil, BP and six other Western oil companies to explore for natural gas, the first time Saudi Arabia has let foreign companies drill for gas or oil since the petroleum industry was nationalized in the 1970s. Still, the Sept. 11 attacks on the US may curb investor interest for months or perhaps years, especially outside the oil industry, analysts said.
"For most non-energy US and European companies, Saudi Arabia was never very high on their lists," said Kevin Taecker, a former US diplomat and former chief economist for Saudi American Bank. "Now it will be even lower."

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