Even as Saudi Arabia – a country in the early stages of a transformational economic plan – continues to tighten its belt, the kingdom’s economic conditions appear to be stabilising following its weak performance in the first quarter (Q1) of 2016.

Reports suggest that Saudi economy is stabilising after the government implemented key reforms in order to address a fiscal and economic crisis because of plunging oil prices.

Activity in the country’s non-oil sector is gradually improving, while the pace of its foreign exchange reserve depletion has moderated in recent months. Moreover, the fall in oil prices observed in July has been short-lived and crude prices are on the rise again due to speculation that major oil producers could reach an agreement to stabilise prices. Overall growth nevertheless remains constrained by the ongoing fiscal consolidation, says a report by FocusEconomics.

The gradual upward trend in oil prices and the country’s massive fiscal buffers are supporting the kingdom’s economic outlook, it says. Moreover, a successful implementation of Saudi Vision 2030 – the government’s economic diversification plan to reduce dependence on oil – could boost the potential for growth. The FocusEconomics Consensus Forecast panelists predict that the economy will grow 1.1 per cent in 2016, which is up 0.1 percentage points from last month’s projection. In 2017, the panel sees gross domestic product (GDP) growth accelerating to 1.7 per cent, the report says.

Saudi Arabia’s economy expanded at its slowest rate in three years during the Q1 of 2016. The country’s GDP grew by just 1.5 per cent in Q1 compared with the year before – its slowest rate since 2013. And while the oil sector grew by 5.1 per cent year-over-year, the non-oil sector shrank by 0.7 per cent – its weakest reading in at least five years. Moreover, output in the construction sector shrank by 1.9 per cent year-over-year in July. Within the non-oil part of the economy, the private sector grew just 0.2 per cent in the first quarter while the government sector shrank 2.6 percent, the official data showed.

INDUSTRIAL SUPPORT

Backing Saudi Arabia’s growth are industrial giants like Schlumberger, General Electric and Siemens who have all contributed plans for the realisation of the kingdom’s revitalisation programme, according to Abdulaziz Al Abdulkarim, Saudi Aramco’s vice-president for procurement and supply chain management.

The state-owned energy giant’s oil infrastructure will receive a $334 billion facelift by 2025, which will enhance the kingdom’s ability to extract shale gas, the executive said at the Middle East Petrotech Conference in Bahrain.

“This will be spent on material and services to support service facilities, infrastructure projects, drilling and maintain (oil) potential projects, unconventional resources both in the exploration phase and development and several other projects,” Abdulkarim says.
 

Saudi Aramco: ready for huge investments

The plan was outlined by Amin Nasser, Saudi Aramco’s CEO - originally last year as part of the 10-year In-Kingdom Total Value Add (IKTVA) plan. It aims to create 500,000 new jobs for Saudis and double the percentage of locally produced energy-related goods to 70 per cent by 2021.

“Working with our suppliers, we will capture value that produces long-term tangible benefits – quality jobs for a growing Saudi population, innovation and diversification of industry, and increased global competitiveness,” the event’s site says.

The largest portion (42 per cent) of funds will go towards developing drilling capabilities, while 31 per cent will develop the kingdom’s surface facilities, such as wells and related equipment.

The plan forecasts that the number of oil and gas drilling wells will increase by 33 per cent to 1,200 and by 50 per cent to 600 by the year 2025, respectively.

In its drive to boost local industry and create jobs, Saudi Aramco also plans to develop an energy industrial city between Al Ahsa and Dammam, which includes manufacturing oil-and-gas equipment and drilling centres for Aramco.

The government has also allocated $44 billion for boosting the infrastructure in key sectors including transport, telecommunications, water and agriculture with the main focus being on the transport development and housing programmes, according to Ken Research, a leading market research and data analytics company.

NON-OIL BUSINESS JUMPS

The Purchasing Managers’ Index (PMI) sponsored by Emirates NBD and produced by IHS Markit, points out that Saudi Arabia’s non-oil private sector continued on its upward trajectory in August, with business conditions improving to the greatest extent in a year. 

The PMI – a composite gauge designed to give a single-figure snapshot of operating conditions in the non-oil private sector economy – signalled a further acceleration in growth during August, moving up from 56.0 in July to 56.6.

The latest reading was at its highest level in a year, says an Emirates NBD report. “That said, whereas business conditions improved strongly in the context of recent data, the index was still below its long-run series average (58.5),” it adds.

Output and new business remained the key growth drivers – both rose sharply and more quickly than in July. Employment and input stocks also increased, with a number of companies looking to expand capacity in line with rising workloads. 
 

Saudi Arabia: boosting its infrastructure

Meanwhile, price pressures intensified in August. The rate of cost inflation accelerated to a ten-month high, which led panelists to raise their charges. The rise in selling prices was only modest, however, it says.  

Commenting on the Emirates NBD Saudi Arabia PMI, Khatija Haque, head of Mena Research at Emirates NBD, says: “The rise in the Emirates NBD Saudi Arabia PMI to the highest level in a year is encouraging, although we note that the average PMI so far this year is still below 2015, indicating a slower rate of private sector growth.  

Stronger export demand has helped support overall new orders, and more firms have increased hiring in August as well.  Record high oil production in July and August likely supported activity in the manufacturing sector over the summer.”

Data pointed to another substantial rise in output during August. The rate of expansion picked up slightly since July, and was the most marked in nearly a year. Activity was bolstered by a further improvement in underlying demand, which was in turn reflected by faster growth of new business. The latest increase was the quickest since last November. As well as stronger demand, firms commented on new projects and enhanced marketing strategies.

Total new work was supported by gains across international markets in August. New export orders rose for the second successive month and at the strongest pace so far in 2016.

On the jobs front, the rate of hiring accelerated to an 11-month high. Panelists indicated that they had raised employment in response to greater business requirements. However, the rise in staff levels was only moderate overall, and insufficient to prevent an accumulation of backlogs. The amount of unfinished work rose for the first time in three months.

With output and new orders increasing markedly, purchasing activity rose further in August. The pace of growth quickened to an 11-month high, ensuring that input stocks continued to build up, the report says.

Firms upped their quantities of purchases in spite of higher costs during August. Purchase prices rose at the fastest pace since last October and, combined with greater salaries, led to a pick-up in the overall rate of cost inflation. Increased costs contributed to a rise in charges set by Saudi Arabia’s non-oil private sector businesses. The rate of inflation was strong relative to the past two years, but still weaker than the average over the survey’s entire history. 

NOTHING OFF LIMITS

Last December, to curb an annual budget deficit of nearly $100 billion caused by slumping oil revenues, the government announced cuts in spending and energy subsidies. Officials had said there will be more austerity steps in coming years.

“The important thing to remember is that austerity will be a multi-year process. There will be more measures in the next few years and these will continue to keep growth subdued,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

From an international perspective, the more recent measures - decision to slash ministerial pay by a fifth - constitute an attempt to convey the government’s seriousness about tackling the budget deficit, economists say.

Apostolos Bantis, head of emerging market corporate credit research at Commerzbank, said the payroll and benefit cuts were “trying to send a signal to investors that the government is serious about reforms and that it’s ready to even touch something sensitive and political”.

“The government is trying to give a signal to the local population that they need to tighten their belts and that this is starting from the top.”

Malik says she estimated that savings from the cuts would amount to less than 1.5 per cent of gross domestic product (GDP).

But she adds that the message was stronger than the anticipated savings. “Nothing is off bounds for potential fiscal reforms and it shows ongoing momentum to narrow the fiscal deficit. This is especially ahead of the expected international bond issuance,” she says.

NCB Capital estimated allowances accounted for about a quarter of the government’s total salary bill last year, which was 38 per cent of its overall budget of about $260 billion. But it is not known how far the latest measures will curb government spending on allowances, which Saudis say are many and varied.

More substantial ways of plugging the budget gap include a $10 billion loan obtained from international banks in May and Saudi Arabia’s debut international bond issue expected in October. Bankers expect it to be worth a minimum of $10 billion. The central bank said it had decided to inject around SR20 billion in time deposits into the banking system and introduced two new maturity periods for repurchase agreements, aiming to help boost financial stability in the local market.