November 3, 2006

UNCTAD REPORT CONFIRMS THAT THE SAUDI, UAE AND TURKISH ECONOMIES ACCOUNT FOR OVER THREE QUARTERS OF WEST ASIA'S INFLOWS. SAUDI ARABIA OPENS ITS DOOR FOR $700 BILLION IN THE FIELD OF INVESTMENTS. THE KINGDOM RENOUNCES $6 BILLION OF ITS LOANS AND PROVIDES AID TO MORE THAN 83 COUNTRIES. SAUDI ARABIA'S PATENTS COMES FIRST AMONGST ARAB COUNTRIES. NEW DISCOVERIES INCREASE GOLD RESERVE IN KINGDOM TO 8 MILLION OUNCE. Since 2002, world economic expansion has had a strong positive impact on growth and helped support progress towards the United Nations Millennium Development Goals (MDGs). Most developing countries have benefited from this growth momentum as a result of strong demand for their exports of primary commodities and, to an increasing extent, of manufactures. However, global economic imbalances continue to pose a risk to the outlook of the world economy. A number of other changes in the external environment for development over the past 10 to 15 years have benefited individual developing countries in different ways, depending on their economic structure and state of development. These include some improvements in market access, provision of debt relief and commitments by donors to substantial increases in ODA, as well as new opportunities to benefit from FDI and increasing migrants remittances. In order for all developing countries to reach the MDGs and to reduce the large gap in living standards with the more advanced economies, the global partnership for development, stipulated in Goal 8 of the MDGs, needs to be strengthened further. Much depends on the ability of developing countries to adopt more proactive policies in support of capital formation, structural change and technological upgrading, and on the latitude available to them in light of international rules and disciplines. The Trade and Development Report 2006 offers relevant ideas and general principles for designing macroeconomic, sectoral and trade policies that can help developing countries to succeed in todays global economic environment. Particular attention is given to policies that support the creative forces of markets and the entrepreneurial dimension of investment. The Report also argues that a global partnership for development will be incomplete without and effective system of global economic governance. Such a system should take into account the specific needs of developing countries. At the same time it should ensure the right balance between sovereignty in national economic policy-making on the one hand, and multilateral disciplines and collective governance on the other. Foreign direct investment (FDI) flows in West Asia achieved record highs in both inward (US$34 billion) and outward (US$16 billion) directions in 2005, says UNCTADs World Investment Report 2006, FDI from Developing and Transition Economies: Implications for Development. Strong economic growth, global oil demand and an improved investment environment played crucial roles in the historic surge of FDI inflows. Oil-rich countries contributed to the growth in FDI outflows from the region and at the intra-regional level. In 2005, FDI inflows to West Asia rose by 85% -- the highest growth rate in the developing world. They increased in 12 countries out of 14 in the region. The United Arab Emirates attracted the largest amount (US$12 billion), followed by Turkey (US$9.7 billion) and Saudi Arabia (US$4.6 billion). Those three economies accounted for over three quarters of the regions inflows. FDI is taking place increasingly at the intra-regional level, particularly in the services sector (for example, in telecommunications and finance), reaching US$14 billion in 2005 in cross-border mergers and acquisitions (M&As) alone, as compared to US$0.6 billion in 2004. The upward shift is partly the result of privatizations promoted in countries such as Bahrain, Jordan, Oman, Turkey and the United Arab Emirates. "Greenfield" Investments are mainly being undertaken in energy-related manufacturing industries. In 2005, FDI outflows from West Asia more than doubled. Oil-rich Gulf countries are traditionally active in portfolio investments abroad. However, they are now allocating more petrodollars to FDI, and are investing widely not only at the intra-regional level but in developing Asia and Africa and in the developed world. Significant recipient industries include energy, tourism, and telecommunications. State-owned companies are active investors. These trends partly reflect a progressively relaxed regulatory framework for FDI. Most countries in the region have liberalized regulations, in particular for non-energy industries such as finance, real estate and telecommunications. These industries consequently attracted much of the regions FDI in 2005. If there are continued efforts towards economic reform and further improvements to the business climate, supported by promising economic growth and high oil prices, further increases in FDI flows - both inward and outward - are likely. However, given continuing geopolitical uncertainty, these flows may be unevenly spread in the region. Africa received record high foreign direct investment (FDI) inflows in 2005 of US$31 billion, but this was mostly concentrated in a few countries and industries, says UNCTADs World Investment Report 2006, FDI from Developing and Transition Economies: Implications for Development. A sharp rise in corporate profitability and high commodity prices over the past two years helped produce a growth rate of 78% in FDI inflows to the region. Prospects are good for another increase in 2006 given high project commitments, large numbers of investors eager to gain access to resources, and a generally favourable policy stance for FDI in the region. FDI continued to be a major source of investment for Africa as its share in gross fixed capital formation increased to 19% in 2005. However, the regions share of global FDI remained low at about 3% in 2005. In the manufacturing sector, a number of transnational corporations (TNCs) in the textile industry pulled out of Africa because quota advantages for African countries declined after the end of the Multi-fibre Arrangement (MFA) in 2005. South Africa was the largest FDI recipient in the region in 2005, experiencing a sharp jump in inflows to US$6.4 billion from only US$0.8 billion in 2004. South Africa accounted for about 21% of the regions total. This was mainly due to the acquisition of Amalgamated Bank of South Africa by Barclays Bank (United Kingdom) for US$5.5 billion. Africas top ten recipient countries - South Africa, Egypt, Nigeria, Morocco, Sudan, Equatorial Guinea, the Democratic Republic of Congo, Algeria, Tunisia and Chad, in that order - accounted for close to 86% of the regional FDI total (figure 2). In eight of these countries, FDI inflows exceeded US$1 billion (more than US$3 billion for Egypt, Nigeria and South Africa in particular). Inflows to South Africa were also the most diversified: investment was channelled into energy, machinery and mining, as well as into banking, which received the largest share. At the other extreme, FDI inflows remained below US$100 million in 34 African countries. These are mostly least developed countries (LDCs), including oil-producing Angola, which witnessed a drastic decline in FDI receipts in 2005. Many of the low FDI recipients in the region have limited natural resources; lack the capacity to engage in significant manufacturing, and, as a result, are among the least integrated into the global production system. Some countries have also experienced political instability or civil war in the recent past, which destroyed much of their already limited production capacity. FDI inflows to the region were concentrated in a few industries, such as oil, gas, and mining. Six oil producing countries (Algeria, Chad, Egypt, Equatorial Guinea, Nigeria and Sudan, in descending order of the value of FDI) accounted for about 48% of inflows to the region. Although countries such as Kenya, Mauritius, Lesotho, Swaziland and Uganda had begun to receive FDI for their textile and apparel industries due to the African Growth and Opportunity Act (AGOA), the trend changed following the end of the MFA in 2005. In Mauritius there was a 30% contraction in the volume of garments manufactured in 2005 following the departure of Hong Kong (China)-owned companies. In Lesotho, six textile TNCs closed, with a loss of 6,650 jobs. The setback demonstrates that the impact of trade-related initiatives can be short-lived in Africa, where domestic capabilities are inadequate for quickly absorbing and continuing production processes. It also underscores the fact that Africas industrial progress requires competitive production capacity, in addition to better market access and more welcoming regulatory frameworks. The persistence of the critical capacity problem may continue to hamper the regions ability to attract and retain FDI in the manufacturing sector. FDI outflows from Africa in 2005 remained small and originated from a few countries. Six home countries -- Egypt, Liberia, Libyan Arab Jamahiriya, Morocco, Nigeria and South Africa -- accounted for over 80% of total outflows. The largest African TNCs are also from a small number of countries. In 2004, nine of the top 10 non-financial African TNCs ranked by foreign assets were South African, although Orascom Construction (Egypt) also made it onto the list. On the other hand a report issued by the General Organziation for Statistics and Information said the Kingdom's exports during the last month of July reached SR 6762 million with Petrochemicals topping the list with a share of SR 2306 million then Plastic products with a share of SR 1619 million, followed by minerals with SR 574 million. Imports reached SR 21562 million in the same period. In the petrochemicals field and according to an October 16 press release, the numbers are the highest-ever for a single quarter since the company was established, and represent an increase of 19 percent over the second quarter of 2006. SABIC Vice Chairman and Chief Executive Officer Mohamed Al-Mady said the operating profits of the first nine months of the current year total $6.6 billion [SR 24.8 billion], compared to $6.58 billion [SR 24.7 billion] for the same period last year. Al-Mady added that the recent profits reflect an improvement in the prices of most products as well as an 8 percent increase in sales from the same period in the previous year. SABIC is the largest public company in the Middle East and one of the world's 10 largest manufacturers of petrochemicals. It is a world market leader in the production of polyethylene, polypropylene, glycols, methanol, MTBE, fertilizers and polymers. It recently acquired Huntsman Petrochemicals for $700 million. In Geneva member of the Shoura Council and member of the International Parliamentary Union Dr Osama Ibn Hamza Abou Gharara presented a paper to the Sustainable Development, Finance and Trade committee of the 115th IPU assembly held in Geneva, 16-18 October 2006, on the development in the Kingdom of Saudi Arabia. In his paper Abu Gharara said the Kingdom has accorded great importance to the UN set eight targets and has focused its development projects on those related directly to the citizens, and has implemented them while concentrating on reducing its general debts. Abu Gharara also spoke about Saudi aid to foreign countries and non refundable loans offered to more than 83 countries. He said the Kingdom has renounced $6 billion in loans to the more needy countries while it is one of the most active members in more that 14 international and regional organizations. Recently the Council of Minister approved the installation of a program in the name of "Emergency Assistances" for families who are living under poverty line and having emergency situations which increase their miseries and difficulties such as death of their guardian, his imprisonment or his and his sons's sickness, or a fire accident in his home or natural disaster etc. This emergency assistance will depend on causes and the degree of the misery. The Council of Ministers also approval to increase the annual appropriations for charity societies from SR 100 million to SR 300 million and the Ministry of Social affairs will be responsible for these charity societies. Abu Gharara spoke of the efforts exerted by the Kingdom in combating poverty and in helping to alleviate the suffering of poor people according to the rules of Islam. In New York Ambassador Dr Mohamed Ibn Abdul Rahman Al Gadei, Consul General of Saudi Arabia spoke about the kingdom position and the role its plays on both the regional and international arenas. He added that the Kingdom of Saudi Arabia under the leadership of the Custodian of the Two Holy Mosques has achieved many steps in the field of economic, political and social reforms. He added that within the next 20 years investment opportunities in the Kingdom will rise to $ 700 million in the fields of electricity, water, communications, petrochemicals, natural gas, agriculture, IT and others. He spoke about King Abdullah economic city which will be implemented at a cost of $ 26 billion. Meanwhile Samba announced that the economic boom in Saudi Arabia continued to gather strength, with 2006 likely to see record oil revenues, and record trade and budget surpluses in an overall context of 20 percent growth and low inflation. Now in its fourth year, we still believe this boom is only beginning, with signs that strong oil prices and revenues will last many years, a government fiscal position that can support growth in spending for years, and megaprojects just getting underway that will carry high growth through 2010 and beyond. Oil remains the anchor of the Saudi economy, and the Kingdom will earn a Samba-forecast $203 billion in oil export earnings this year; an all-time record and up 25 percent from the record last year of $162 billion. Even while allowing the government to provide strong fiscal stimulus to the economy, the oil revenues are not being spent as fast as they are being earned. Of the roughly $17 billion per month in oil export earnings, about $7 billion per month is accumulating as foreign assets at the central bank. Underlying the strength in the oil market is continued exceptional global economic growth and demand for crude oil as well as oil disruption concerns in oil-producing regions of the world. Oil prices hit all-time highs during the first half of the year and ended the half at $74 per barrel (West Texas Intermediate, WTI). Our forecast, upwardly revised, is that WTI will average $68 for the year, and the average price for Saudi crude oil will be $62.50 per barrel, well above the $38 per barrel needed to meet the Saudi government budget's revenue projection. Saudi oil production is likely to average 9.4 million barrels per day (b/d) in 2006, the same as in 2005. The local stock market, which experienced a sharp rise then decline, attracted the most attention in the first half of the year. From the top in late February to the bottom in early May, the market moved down 54 percent. From year-end 2005 to the end of June 2006, the market was down 21 percent. The downturn does, have economic implications -- a likely slowdown in retail sales, business investment, and banking sector earnings growth. These are more than offset, however, by the strength of the oil market, and we have revised upward our forecasts for GDP growth for 2006. The aspect of the stock market that continued to generate wealth is the Initial Public Offerings (IPO's). At the end of June 2006, every IPO since 2003 remained profitable, some extremely profitable, from the offering price. Besides oil and the stock market, the other major theme of the first half of 2006 was megaprojects. Large infrastructure investment is surging. Our assessment of major project activity shows some 37 major projects that are underway or have a high likelihood of implementation over the next several years with a total value of $283 billion. Hydrocarbons -- crude oil production, refining and petrochemicals production -- dominate, especially where private sector investment is concerned, but projects are in a wide array of industries and geographically dispersed around the Kingdom. Our macroeconomic forecast is for nominal GDP growth of 20 percent this year, and real GDP growth of 5.8 percent. The difference is that nominal growth captures the rising price of oil, so we find this to be a better measure of what is atually occurring. The non-oil private sector will grow 8.9 percent in real terms, the highest growth in 25 years, inflation will be under 2 percent. The strong oil export earnings will be the main factor behind a likely current account surplus of $114 billion, the eighth surplus in a row. The trade profile of the Kingdom is healthy. Government finances are also strong and growing stronger. Even with likely spending growth of 20 percent over 2005 levels, the government will still run a record surplus in 2006 of a Samba-forecast SR 250 billion ($67 billion). Government debt, all domestically held and riyal-denominated, will decline to about SR 380 billion ($101 billion), or 27 percent of GDP. Foreign assets at the central bank will grow to about SR 840 billion ($224 billion), enough to provide budgetary support for years to come and defend the currency's peg to the dollar. In that regard, there was speculation recently of a revaluation upward of the riyal's exchange rate against the dollar. The central bank made clear this is not going to happen anytime soon. These strong conditions -- high oil revenues, stimulative fiscal policy, robust non-oil growth, low inflation, and surging investment in major projects -- are likely to continue well beyond 2006. The challenges to emerge will be those associated with managing high growth -- keeping inflation under control, ensuring that investment in fixed assets and government spending remain efficient, and keeping surging imports from overtaking exports. Having such challenges, however, is the envy of many economies around the world. In Cairo a study published by the Arab Planning Institute pointed that the Kingdom of Saudi Arabia came first in the Patents list followed by the United Arab Emirates in the second place and Kuwait in the third place. The study praised the encouragement provided to talented and inventors especially in the member states of the GCC. On the other hand Saudi Aramco's Board of Directors gave its resounding support to the company's budget and expansion plans when it met recently in Dhahran under the chairmanship of Ali I. Al-Naimi, the Minister of Petroleum and Mineral Resources. Board members were briefed on the company's proposed capital and non-capital budgets as well as the company plans and programs under development. All expenditure requests were approved. They also received a report on the massive Khurais Project, which will add 1.2 million barrels per day of Arabian Light Crude to the Kingdom's hydrocarbon stream. The Khurais Field will be nurtured both by the company's longstanding experience and the latest reservoir management techniques to ensure longevity and maximum oil recovery. A report about the development of the Karan Field also was received in which Board members learned of the company's plans to harvest as much as 1 billion standard cubic feet per day of Khuff gas. In addition to all of the company's upstream development plans, Board members appreciated the company's approach to expansion of downstream activities and were advised of progress on engineering, procurement and construction of the Rabigh Refining and Petrochemical Project (PETRORabigh). The Rabigh Project loans have been syndicated, and the company is working to develop a conversion industry park next to the project. Board members expressed their appreciation to all company employees for the roles they are playing in the development and expansion of the Kingdom's hydrocarbon resources, its economy and knowledge base. "The company is administering and executing ambitious upstream and downstream expansion programs, involving historically high levels of capital expenditures," president and CEO Abdallah S. Jum'ah said. "All these operations and activities place responsibilities upon all levels of management and all employees," he added. "In the performance of our jobs, in the achievement of our corporate objectives, and in the preservation of the safety of our people and operations, we must all do our part and take personal responsibility." Meanwhile the kingdom gold reserve has increased to 8 million ounce through the new exploration program implemented by Maaden. The company stressed that it plans to increase the gold reserves to 10 million ounce by the year 2010.