Executive Summary

• The global economy is undergoing a severe recession as a result of the financial crisis. The IMF has slightly worsened the outlook for the reduction of world GDP from 1.3% to 1.4% in 2009. But the 2010 forecast for world economic growth was raised to 2.5%. While still clouded by high uncertainty, this outlook will depend on a recovery in the global financial system and aggressive fiscal and monetary policies in major economies providing support for aggregate demand.

• Saudi Arabia will see real GDP growth contract by 1% in 2009, as a result of the marked fall in oil production level. Growth in the non-oil sector is expected to moderate on weakening private consumption and investment expenditures. Nevertheless, government investment expenditure will provide the largest contribution to growth this year. This is based on aggressive fiscal policy plans emphasizing capital expenditure as well as indirect fiscal stimulus to the non-oil sector. Real GDP growth is expected to increase by 3% in 2010, based on a recovery in global demand conditions and a higher oil production level.

• Saudi crude oil prices are expected to average around USD54/bbl in 2009. The fiscal account will fall into deficit of around 4% of GDP, as the government resorts to its accumulated reserves to increase expenditure and support economic growth. The current account is expected to fall into a relatively smaller deficit of around 3% of GDP, as imports are expected to decline. But with Saudi crude oil prices moving higher to an average of USD65/bbl in 2010, the twin balances will once again realize surpluses. With low levels of domestic debt and large reserves, we believe Saudi Arabia will be able to ride out the crisis.

• The Saudi Arabian Monetary Authority (SAMA) has been very proactive in loosening monetary policy and ensuring that liquidity is available. Saudi interbank rates have fallen and deposits now are growing faster than lending, which has brought down the loans-to-deposit ratio to 77%. However, private sector credit growth is still sluggish, due to lower investment demand and tighter bank lending. In addition, the availability of USD-denominated funds remains limited. SAMA is likely to keep interest rates low for the remainder of the year, but will consider slightly higher rates as the Federal Reserve is expected to gradually tighten monetary policy in 2010.

• Saudi banks entered the crisis in a strong position compared to other financial institutions in advanced economies. While the Saudi banking sector was able to absorb most of the initial impact of the crisis, the challenge now is how to deal with the second round effects owing to slowing domestic demand. Financial markets are now beginning to show some signs of stabilization. Confidence levels have improved, with rising oil prices and expectations of a faster recovery in global demand by 2010. This is reflected in a rising stock market and the return of IPO and sukuk issuances.

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