BUOYANT SAUDI ECONOMY BUCKS GLOBAL TREND

Saudi Arabia moved swiftly to cut interest rates after the US Federal Reserve slashed its rates by 25 basis points (bps) at the end of July.

The Saudi Arabia Monetary Authority (SAMA) lowered its repo rate from 300 bps to 275 bps, and reverse repo rate from 250 basis points to 225 basis points with immediate effect. As the Saudi riyal is pegged to the US dollar, any change in the US interest rate necessitates a corresponding change in Saudi monetary policy.

The rate cut should ease the investment environment and boost consumption in the kingdom and the wider world as a number of central banks have also cut rates to boost growth.

The stimulus comes amid news that Saudi Arabia’s current account surplus widened by 25.1% year on year in the first quarter of 2019, to USD 11.5 billion, according to data from the country’s statistics authority. The value of non-oil exports grew by 2.1%. However, with imports also rising, the trade surplus was broadly unchanged year on year and sharply lower than in the previous quarter, the General Authority for Statistics (GaStat) said.

Meanwhile, the country’s budget deficit in the first half of 2019 contracted to SAR 5.7 billion, compared to SAR 41.7 billion in the same period last year, according to the Ministry of Finance. Total revenues increased by 15% while total expenses rose by a more moderate 6%, as the government attempts to rationalise spending.

“The results of the first half of the year confirm the effectiveness of the financial and structural reforms implemented by the government, including diversification of government revenue sources through the implementation of initiatives aimed at increasing non-oil revenues, as well as development of public financial management to raise the efficiency and effectiveness of spending, which recently included the approval of the Government Procurement Law,” the Ministry of Finance said in a report. “The results, also, reflect the progress in executing development projects according to the Saudi Vision 2030.”

Non-oil revenues rose by 14.4%, on the back of increased economic activity and new reform initiatives. The ministry’s preliminary data shows tax revenues on goods and services soared by 48% as a result of the increase in revenues generated from value added tax and expat fees. Trade and international transactions increased by 10%, while oil revenues also saw a 15% jump as efforts by the kingdom and its allies to manage oil production pays off.

“On the expenditures side, social benefits and employees' compensation increased by 3% each, compared to the same period last year. Subsidies were more than doubled as a result of the implementation of the private sector stimulus plan,” the ministry said.

“The period witnessed a continued increase of spending on social protection programmes such as Citizens' Accounts, social security, cost-of-living allowance and student bonuses. Spending on health, social development and municipal services increased by 13% and 22%, respectively.”

Equally crucial, capital expenditure surged by 22% as the government rolled out housing and other development projects.

The internal and external borrowing during the first half of the year amounted to about SAR 67.9 billion, which will be used to finance part of the expected deficit until the end of the year. The debt balance as at the end of June 2019 amounted to SAR 627.8 billion.

A key component of the economy is continued investment in the oil sector, and its focus on including Saudi companies in the procurement process. In July, Saudi Aramco, awarded 34 contracts worth USD 18 billion to 16 companies for engineering, procurement and construction (EPC) work on projects to expand oil production at the offshore Marjan and Berri fields, located in the Gulf, by a combined 550,000 barrels per day.

The company noted that 50% of contracts are being awarded to Saudi Arabian companies, increasing the share of locally sourced materials.

“Contractors working on these projects are required to maximise the procurement of material and equipment from local suppliers and manufacturers to help achieve Saudi Aramco’s In-Kingdom Total Value Add Program (IKTVA) goals, which aim to increase the company’s locally sourced goods and services to 70% by 2021,” Aramco said. “The projects are expected to create thousands of direct and indirect jobs, supporting Saudi Aramco's efforts to localise and create new job opportunities.”

The economic stimulus are important as the global economic outlook remains muted, and governments need to boost fiscal stimulus.

Markit’s latest purchasing managers index shows business conditions continued to improve across Saudi Arabia’s non-oil private sector in July “However, slower increases in output and new orders, alongside a further weakening in business confidence, underlined a generally softer start to the third quarter,” the business intelligence firm said in its monthly report.

Firms that reported higher business activity often linked this to a sustained upturn in new orders. July marked the 15th month in a row in which an increase in new work has been recorded

An area where the survey pointed to improvement was exports, which continue to show signs of recovery following a moderate few years, Markit said.