Saudi Arabia: Inflation risk downplayed

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Several of Saudi Arabia’s major cities – Jeddah, Riyadh and Mecca – and surrounding areas will benefit from plans to roll out public transport and construction projects over the next five years as part of a government drive to boost growth and address the Kingdom’s social needs.

The government’s decision to channel major investment into wide-ranging infrastructure ventures across Saudi Arabia’s three largest cities signals extensive opportunities for foreign and domestic bidders. However, news in recent months of key projects has been tempered by the annual IMF assessment of the Kingdom, published in August, which highlighted potential risks of high spending and rapid growth.

Most recently, Saudi Arabia announced plans to build a metro system estimated at $9.3bn in Jeddah, which will include three lines and 46 stations.

The city’s mayor, Hani Mohammed Aburas, told OBG that the transport project was now taking shape. “We are in the process of getting approval for our metro system,” he said. “We have proposed a 108-km network around the city. Once the budget is approved, construction can begin.”

Aburas was confident that given time, the public would adapt to the new mode of transport, telling OBG, “It will quickly become the most important traffic medium in the city for both Saudis and expatriates”.

News of the Jeddah project came just weeks after the government’s announcement in August that a $16.5bn plan to modernise public transport in the holy city of Makkah had been approved.

The Makkah project includes a 182-km metro system and bus network, with construction due to begin on the rail system in 2013. According to METenders, local construction firm Al Balad Al Ameen Company will team up with advisors Ernst & Young, Ashurst, and Parsons Brinckerhoff to develop procurement packages for the first phase of the project, including rail infrastructure, railway systems, rolling stock, depot and operations.

In July, Riyadh pre-qualified four consortia to bid for building its metro. Bidding is also expected to open soon for the other two systems, which are still in the early planning stages.

While news of Saudi Arabia’s extensive projects is generating interest among investors, international press agencies have also given coverage to the IMF’s warning that the current increase in spending levels could reduce the Kingdom’s financial cushion, leaving it unable to preserve its oil wealth for future generations. In addition, Reuters highlighted the report’s note of caution on inflation, which, according to the IMF, could rise as a result of robust growth.

Saudi Arabia increased its spending levels to a record $214bn in 2011, 39% higher than initially planned, according to Gulf Business. Inflation fell to 4.9% in June, reaching its lowest level since August 2011.

The Minister of Finance Ibrahim Al Assaf has remained upbeat in the face of the IMF’s findings, telling the news channel Al Arabiya that the Kingdom’s spending came on the back of secure investments which had provided firm foundations for the government to focus on infrastructure, human resources and social welfare.

He voiced his confidence that the economy would continue on a safe growth path of 5.9% per year, while also highlighting the resilience that the Kingdom had shown to the eurozone crisis. “We were able in the past few years to formulate medium-range fiscal policies,” Al Assaf told Al Arabiya, “and the reason is because we built suitable reserves, especially investments that allow us to implement fiscal policies even if the oil prices fluctuate as we have witnessed in the past.” The high price of oil, currently at about $110 per barrel, has also helped strengthen the Kingdom’s fiscal position.

Saudi Arabia is set to lead the Middle East and North Africa (MENA) region in infrastructure and construction spending over the next 15 years as it galvanises efforts to drive growth. “Due to many years of underinvestment, we expect Saudi Arabia to take the lead in terms of construction spending in the MENA region as the Kingdom responds positively to pressing social needs such as labour, housing and education,” Bank of America Merrill Lynch’s president and country executive for MENA, Philip Southwell, told the Saudi Gazette.

The IMF fell short of giving what it considered to be an appropriate level of spending in its report on Saudi Arabia. However, the organisation highlighted the importance of ensuring expenditure was efficient and urged the Kingdom to maintain flexibility on welfare spending. “While the government has built significant policy buffers, fiscal spending is above the level consistent with an intergenerationally equitable drawdown of oil wealth,” the IMF said.

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