Emerging Markets Daily
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16 Iunie 2010 |
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CITIBANK EUROPE PLC, DUBLIN - SUCURSALA ROMANIA |
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CEEMEA Edition
Focus on Saudi Arabia — Pressing ahead with the economic cities. Saudi Arabia has the means and will to press ahead with ambitious plans for building four new economic cities despite rising global uncertainties, but the long-term viability of the cities will in part depend on soft-infrastructure.
Poland — Inflation falls but weak FX remains a risk factor. Our expected scenario is not one of very high inflation, though we suppose that when the inflation resumes its upward trend the MPC will become more hawkish.
Romania — Government survives no-confidence vote. The narrow margin of the victory paints a challenging picture in terms of the government's ability to press ahead with the reform agenda under the umbrella of the IMF programme.
Turkey — Budget performance buoyed by strong revenues. Despite the solid budget figures so far, the upcoming 2011 general elections may pose a threat to fiscal discipline.
Industrial Countries — The steep drop in oil prices probably pushed down May US producer prices. We think housing starts and building permits will come back into line with improving housing fundamentals. May industrial production probably jumped again. We expect the two UK unemployment measures to continue their divergence – declines in claimant count but rises in the LFS measure. There are no major releases in the euro area today.
Focus on Saudi Arabia
Pressing ahead with the economic cities
The Kingdom of Saudi Arabia is pressing ahead with the construction of four economic cities despite regional and global uncertainties. The total cost of the four cities is expected to be US$69billion, according to the Saudi Arabian General Investment Authority (SAGIA), which is in charge of implementation of the projects. While the government of Saudi Arabia will fund the development of the basic infrastructure of the four cities, the intention is that the vast majority of investment in the cities will come from the private sector. However, the re-emergence of global economic uncertainties and tightness in global credit conditions raises questions regarding the ability of the private sector to deliver on these expectations.
Demographic and regional imbalances mean the government will be willing to pick up the slack. SAGIA expects that the four cities combined should create around 1.2 million jobs, and draw a population of almost three million people. In a country where 56% of the local population is under the age of 19, and where only around 10% of the local population between the ages of 20 and 60 are employed in the private sector, the need for job creation is self-evident. Moreover, the new economic cities are a potentially potent tool to address regional imbalances in economic development: in 2009, almost 70% of private sector jobs were concentrated in the cities of Riyadh, Dammam and Jeddah. Thus, regardless of the investment appetite of the private sector, we expect that the Saudi authorities will push forward with implementation of the cities, even if this means they bear a greater share of the financial burden.
Saudi Arabia can afford the cost. Even in the extreme scenario where 100% of the cost of developing the economic cities is borne by the Saudi government, the accumulation of wealth from high oil prices over the past 10 years has given Saudi Arabia a significant buffer to absorb these comfortably. In NPV terms, we calculate the $69bn investment (assuming an equal distribution of outlays over the next 10 years) amounts to under 15% of the government's net foreign assets, which will continue to accumulate in an environment where oil prices are above $55 per barrel.
Success of cities will depend in large part on soft infrastructure. Even if the government can afford to finance the cities itself, success in drawing private sector investors is key to the goal of creating jobs and spreading wealth. Moreover, the long-term viability of the cities is dependent on their ability to attract labour both internally and externally. The work/life environment is thus a critical factor, particularly to foreign skilled workers. Affording the cities a measure of independence from some of Saudi Arabia's relatively strict social laws and providing other incentives for foreigners to move to the cities will be important. In this regard, the Economic Cities Act, which, among other things, provides for foreign free-hold ownership of property in certain new cities, is a constructive step forward in ensuring the viability of the cities in our view.
