The Saudi economy is forecast to shrink 1.2 per cent this year, despite a stronger market for oil and expanded government investment, it was revealed on Monday.

The recovery of oil prices to above $60 a barrel and a forecast 24 per cent increase in government spending is not enough to offset a sharp slowdown in private sector activity, Riyadh-based Samba Bank said.

"Public sector investment has been vigorous in both the oil and non-oil sectors; private investment, in contrast, remains weak, hemmed in by extremely tight credit conditions and poor export prospects," Samba said, according to a report in our sister publication, the Gulf Daily News.

It forecast GDP would contract by 1.2 per cent after 4.5 per cent growth last year. Growth would resume next year hitting 4.4 per cent, the bank predicted.

It pointed to a continuing weakness in markets for petrochemicals and refined products, the country's leading exports after oil and natural gas, with prices for polyethylene still at half the highs of mid-2008, for example.

Multi-billion-dollar refinery and petrochemical projects expected to carry economic growth have been delayed, Samba said, including the Jubail refinery planned by state oil giant Aramco and France's Total.

"Banks' perception of deteriorating export prospects appear to have played a part in the squeezing of credit flow to such projects," Samba said.

Samba also pointed to a large oversupply in the commercial real estate market and slow investment in the government's heavily promoted new economic cities, including the ambitious King Abdullah Economic City north of Jeddah on the Red Sea.

"Although $35 billion in finance was raised for the city last year, conditions have changed, and new finance is proving difficult to attract." – TradeArabia News Service