SAUDI FOCUSES FROM GROWTH TO COMPETITIVENESS

Saudi Arabia’s real GDP is expected to rise 1.9% this year, before climbing to 3% next year, according to the International Monetary Fund (IMF).

The IMF also expects the non-oil sector to grow 2.9% in 2019, outpacing oil growth of 0.7%. In 2020, both oil and non-oil economy will fuel expansion, with non-oil rising 2.7%, and the oil sector expanding by an impressive 3.5%.

By 2020, non-oil GDP will surpass USD 2 trillion (67.6% of GDP) and steadily climb to USD 2.5 trillion by 2025, making up 72.7% of the country’s GDP, the IMF estimates in its latest assessment of the kingdom.

The Saudi authorities have informed the IMF that they will continue their efforts to improve the country’s business environment, develop new economic sectors, broaden financing options for businesses, and strengthen the human capital of Saudi nationals.

The IMF has welcomed the efforts and believes the current incentives for workers and businesses and cost competitiveness of Saudi labour can be enhanced.

“The economic footprint of the public sector has expanded through higher government spending, the increased role of the PIF, and numerous other programmes, including subsidies for housing, mortgages, and SME development,” the IMF said. “The authorities responded that their policies were designed to crowd in the private sector and government interventions were only taking place in areas where the private sector was unwilling to enter on its own.”

The Saudi Ministry of Finance welcomes the report, noting that most of the IMF recommendations are in line with the measures taken by the government that would achieve fiscal sustainability “according to best practices, including the continuous progress in reforms to improve efficiency of public financial management, and work to achieve financial stability and spur economic growth”.

The kingdom’s unemployment rate has also fallen in recent years, as the government rolled out new initiatives and placed job creation at front and centre of each new major project. Unemployment rate fell to 12.5% from 12.8% in 2017.

Several fiscal measures have boosted prices in recent years, including excise tax on tobacco and soft drinks in 2017, and value-added tax (VAT) and fuel subsidy reductions in 2018. However, the inflationary impact of those measures was brief and partly offset by opposing trends, such as declining rents.

The base effect resulting from the introduction of VAT and higher petrol prices at the start of 2018 has had a strong effect on year-on-year inflation so far in 2019, with the consumer price index (CPI) registering a 1.6% decline in the second quarter – unchanged compared to the first quarter, according to the Saudi Arabian Monetary Authority.

During the second quarter, housing, water, electricity, gas and other fuels registered the highest year-on-year decrease of 7.5%, followed by communication with 0.9%, recreation and culture with 0.7%, clothing and footwear with 0.4%, and furnishings, household equipment and maintenance with 0.1%.

Saudi authorities also matched the US Federal Reserve interest rate cut in September for a second time this year.

The kingdom’s business procurement managers are also of the opinion that domestic business sentiment is quickly improving.

Stronger domestic demand drove a faster upturn in output in August, which recovered from July's five-month low. On the price front, overall input costs decreased for the fourth time in the past eight months, driven by declines in both purchasing costs and wage bills, according to IHS Markit, which survey purchasing managers’ index across more than 70 countries. Meanwhile, business confidence among companies in Saudi Arabia's non-oil private sector picked up to a three-month high, amid forecasts of stronger customer demand in the year ahead.

“The upturn in business conditions seen in August was led by a slight quickening of overall new order growth,” Markit noted. “Export sales also increased solidly, though at a slower pace than in July. As a result, domestic markets were the main impetus for inflows of new business. Increased demand resulted in higher overall output in August, with the rate of growth quickening from July.”

Saudi credit to the private sector rose 3.4% year on year (+0.5% m-o-m) in July, while bank claims on public sector rose by 26.4% y-o-y (+4.7% m-o-m) in the same month, according to SAMA. In addition, deposits surged 3.7% y-o-y (-0.7% m-o-m) during the same month.