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Saudi to hold rates, keep spending to boost economy

Saudi Arabia, the Arab world’s largest economy, is in no rush to raise interest rates and will keep plowing its oil revenue into kick-starting growth.

Central bank Governor Muhammad al-Jasser said in a Jan. 23 interview he’s not planning to raise rates because inflation isn’t a concern and demand isn’t strong enough to require higher borrowing costs. Finance Minister Ibrahim al-Assaf told an investors’ conference in Riyadh yesterday that a “continuous stimulus” is needed even as the economy rebounds from last year’s stagnation.

Saudi Arabia’s economy will grow more than 4 percent in 2010 after expanding less than 0.2 percent last year, the finance minister said. Gross domestic product increased 4.3 percent in 2008.

The kingdom, the world’s largest oil exporter, last year announced that it would spend $400 billion on infrastructure over a five-year period to bolster the economy, the largest stimulus package in the Group of 20 nations. The country is allocating almost $70 billion to investments this year, a 16 percent increase on 2009. Rising oil prices, which have rebounded to about $75 a barrel from less than $35 in February, are also likely to boost growth this year.

“Stimulus packages shouldn’t be withdrawn prematurely, nor should they be extended more than required so as not to produce inflationary pressures,” al-Assaf said.

The Saudi government only managed to avoid recession last year through a large injection of public funds into the economy, said John Sfakianakis, Riyadh-based chief economist at Banque Saudi Fransi. It must extend its stimulus measures this year, he said.

“2010 will be a recovery year for the Saudi economy, based on high government spending,” he said. “This is what will keep the engine of the economy going.”

Businesses operating in Saudi Arabia may still struggle to get credit as foreign banks are reluctant to lend and local banks don’t have the resources to finance large projects, Samba, the kingdom’s second-largest bank, said in a report on Jan. 18.

“Until banks have the confidence to lend we won’t see credit conditions improving and this will hold back the recovery,” Paul Gamble, head of research at Jadwa Investment, said in an interview at an investors’ conference in Riyadh .

Bank lending slowed following the financial market turmoil and the default of two Saudi family conglomerates, Ahmad Hamad Algosaibi & Brothers Co. and Saad Group. Eighty lenders, including BNP Paribas SA and Citigroup Inc., are owed at least $15.7 billion, sparking a flurry of litigation.


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