According to the latest purchasing manager’s index (PMI) produced by Markit/HSBC, Saudi Arabia has continued to show economic expansion throughout the first two months of the last quarter with readings over 60 which indicate strong expansion. These PMI readings were strong even before the announcement that the state would be investing SAR 250 billion in the house building industry.

In addition to the aforementioned spending package directed at the house building industry, the country is also seeing considerable amounts of investment being directed towards large scale infrastructure projects. An example of this is the pledge by the Government to spend over SAR 10 billion upgrading the waste water, sewerage networks and the strategic reservoirs in both Riyadh and Jeddah. This is part of a concerted effort to improve the country’s infrastructure as well as responding to increased levels of domestic demand as the country’s population expands.

Turning to the oil industry, Saudi Arabia increased production in an attempt to fill the shortfall resulting from the interruption to Libyan supply and capitalise on resilient oil prices which are currently trading consistently above the $100 a barrel mark. High oil prices, along with global commodities, have contributed to an increase in inflation which is forecast to reach 5.5% this year. However, with weak growth in America and a resurgence of debt issues in Europe, demand for oil has reduced over the past quarter which will potentially curb underlying inflation in the short term.

Following the large sell off in May, which resulted in the sharpest weekly decline in oil prices on record, it is possible that peak prices have been reached for the year. To this end Saudi Arabia runs the risk of being forced to cut back its ambitious spending policies which are feasible in light of current oil prices but below $80 per barrel risk leading to a budget deficit.

An example of Saudi Arabia’s continued commitment to counter cyclical spending policies as a means to drive recovery in the domestic market can be seen in their recent SAR 4.8 billion loan to Emaar Economic City, which is intended to boost activity at King Abdullah Economic City (KAEC). The development, which is jointly owned by Emaar Properties and the Saudi state, is set to create one million jobs and house over two million people.

The success of this development and indeed the other economic cities across Saudi Arabia relies on delivering high quality infrastructure on time and on budget in order to attract end users who will build out the final product and populate the development. The recent loan to Emaar Properties will go some way to ensuring that this is made possible.

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