Slowing Saudi economy will affect Egypt, region

Daily News Egypt
4 Min Read

CAIRO: Saudi Arabia s central bank on Tuesday cut two key lending rates by 50 basis points, with regional markets watching anxiously as the kingdom battles the effects of the global financial crisis.

The move is an aggressive push to boost domestic liquidity in a country that is key to the region s economic strength.

When the Saudi economy slows down this much, that really hurts everybody, John Sfakianakis, chief economist at the Saudi British Bank, said. It is felt in the Middle East.

The Saudi Arabian Monetary Agency s decision to cut the repurchase rate and the reverse repurchase rate marked its latest efforts at easing cash flow and supporting private sector growth in the kingdom. It came as the Federal Reserve was widely expected to slash its key lending rate to help revive the faltering US economy.

SAMA lowered the repo rate – the rate at which it lends money to commercial banks – to 2.5 percent from 3 percent, and reduced the reverse repo rate to 1.5 percent from 2 percent, the official Saudi Press Agency reported.

A roughly 56 percent slide in the Saudi stock market this year highlights investor concerns in the Arab world s largest economy. The percentage of the slide is trumped regionally only by bourses in the United Arab Emirates sheikdom of Dubai and Egypt, the Arab world s most populous nation.

Sfakianakis said the Fed s readiness to cut its key lending rate was the icing on the cake for SAMA.

Ultimately, however, Saudi officials are concerned the global economic meltdown will undercut private sector growth at a time when growth in the oil sector is being threatened by slumping crude prices, currently about 65 percent below a mid-July record of almost $150 per barrel.

While Saudi Arabia s economy is more diversified than that of some other Arab producers like Kuwait, Riyadh cannot afford to be passive.

Sfakianakis said real economic growth in the kingdom – roughly 5 percent in 2008 – was projected to fall to about 1.9 percent in 2009, according to his estimates.

Such a decline presents regional challenges, as Saudi is a key investor in Arab countries like Egypt, which is also trying to mitigate the impact of the global slowdown and counts on Gulf Arab investments.

Egypt s prime minister said Monday the country would likely see lower foreign investments, as well as a drop in vital Suez Canal revenues, because of the world s economic woes. He also predicted that economic growth would slow to 5.5 percent in the next two fiscal years – down from 7.2 percent in fiscal 2007-2008.

A slowdown in growth in Saudi Arabia could undercut economic growth and strain government spending in Egypt, a country where the World Bank estimates that about 20 percent of the population lives on roughly $2 per day.

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