The Gulf kingdom's real GDP is projected to grow by around 4.2 per cent this year compared with 6.8 per cent in 2012 and as high as 8.5 per cent in 2011, the Riyadh-based Jadwa Investment said in a study sent to Emirates 24/7.

"We expect economic growth to fall to 4.2 per cent in 2013, down from 6.8 per cent in 2012. This decline is because oil production is forecast to drop by 1.5 per cent after a 5.5 per cent rise in 2012.

Growth in the non-oil economy will be 5.8 per cent," it said.

"The non-oil sector will benefit from elevated government spending as well as corporate lending and solid domestic consumption. We expect 2013 to be the fifth consecutive year that the economy is driven by expansionary fiscal policy."

Jadwa said it expected the total government expenditure to be equivalent to 31 per cent of GDP compared with an average of 30.4 per cent in the last ten years.

It noted that high public sector expenditures particularly investment spending is "psychologically" important for the private sector. Non-oil private GDP growth is forecast at 6.3 per cent compared with a 4.9 per cent average for the last ten years, the report said.

"This willingness and ability to support the economy will be important in 2013 as international and regional events are dampening sentiment and have the potential to damage the economy," the report said.

It said the main economic risk is from the situation in the Euro-zone and fiscal uncertainty in the United States, adding that the "fluid" regional political situation will continue to make foreign investors wary and impact the sales of companies that export to the region. It also brings the risk of stock market and oil price volatility.

"The impact of government spending across the sectors of the economy will depend on the nature of such spending....while government investment spending is budgeted at a new all-time high, we expect an over-spending that will take investment spending to 10.3 per cent of GDP compared with 7.8 per cent in the last ten years," Jadwa said.

"This will maintain a solid performance by the private non-oil sector particularly construction activities.... we expect the latter to maintain its position as one of the fastest growing sectors in the Kingdom in 2013."

Turning to the fiscal policy, the report said high spending will continue to underpin the economy, citing the recently-announced 2013 budget, which projects a surplus of SR9 billion, based on revenues of SR829 billion and expenditure of SR820 billion.

It said this is the second consecutive year since 2008 that the Kingdom, the world's dominant oil exporter, has budgeted for a surplus.

"The budget highlights again the government's intention to continue to stimulate the economy. Budgeted investment spending, raised by 28 per cent to an all-time high of SR285 billion, will support healthy economic growth and provide encouragement and opportunities for the private sector at a time of global and regional uncertainty," it said.

"While revenue projection is less conservative than in previous years, in the event of a shortfall in revenues, any deficit can be financed comfortably by drawing from SAMA's huge stock of foreign assets, which stood at $635 billion at the end of November."