BUOYANT SAUDI ECONOMY BUCKS GLOBAL TREND

Saudi Arabia’s medium-term economic outlook is improving quickly, amid a strong increase in oil prices and expansion of the non-oil sector, according to the Saudi Arabian Monetary Authority (SAMA).

“For the non-oil sector, growth is expected to be stimulated by expansionary fiscal policy, as the budget for 2019 shows a significant increase in capital expenditure by SAR 245 billion,” said SAMA in its Fiscal Stability report in June.

While global headwinds could clip economic growth, SAMA says the country’s structural reforms will also place some pressure on economic growth in the short term. But the government has introduced some initiatives to mitigate the negative impacts, especially for low- and middle-income households.

“Overall, the Saudi economy remains quite resilient against contagion from growing uncertainty in the global economy,” SAMA said. “High levels of foreign reserves and a low level of public debt mean that there is ample fiscal space to counter an economic downturn. This being said, in the longer term it is vital that initiatives to strengthen and diversify the Saudi economy continue in line with the economic aspirations of Vision 2030.”

Saudi Arabia’s fiscal situation also remains strong after stress test undertaken by SAMA show that Saudi banks can easily withstand various economic shock scenarios.

“The stress test results using all three stress scenarios suggest that the banking sector will remain well capitalised under large shocks,” SAMA noted. “Banks’ capital adequacy ratios are still comfortably above the Basel requirement of 8% and above SAMA’s threshold of 12% of a minimum CAR (capital adequacy ratio) requirement.”

The central bank also believes bank assets will likely grow as the kingdom’s fiscal policy rolls out, private sector activity rebounds and oil prices pick up.

“Claims remains the main source of asset growth, but there was also a positive contribution of private claims after sequential contractions since the fourth quarter of 2016,” SAMA said. “The increase in private sector claims is in line with the market expectations as government stimulus packages start to unfold and are expected to further increase in 2019.”

Purchasing managers index (PMI) is also showing signs of rapid improvement in economic activity, climbing to a 17-month high of 57.3 in May, according to Markit.

Output across the non-oil private sector rose sharply and the most since December 2017, buoyed by stronger underlying demand conditions according to reports from surveyed businesses.

“Inflows of new business likewise increased steeply, with the rate of growth reaccelerating and running at one of the fastest seen over the past four years. This partly reflected a further pick-up in export orders, which rose at the quickest pace since February 2017,” Markit said in its latest survey of the kingdom’s business sentiment.

Firms across the non-oil private sector scaled up their purchasing activity in May to support increased output requirements. Growth in buying levels reached the strongest since late-2017 as a number of firms looked to bolster stock levels amid expectations of higher demand, partly due to the Ramadan season.

Saudi Arabia’s reform agenda is expected to continue as Saudi Vison 2030 takes shape and the various ministries and agencies look to meet their 2020 National Transformation Plan goals.

The country’s reform agenda has been recognised by leading think tanks. In May, Swiss-based IMD World Competitiveness Center ranked Saudi Arabia as one of the most improved economies this year in its latest IMD World Competitiveness Ranking.

The kingdom jumped 13 spots to become this year’s 26th most competitive economy in the world out of 63 nations. The country fared better than emerging market peers Indonesia, India, South Africa and Russia.

Saudi Arabia registered the highest global ranking for investment in education and fared well in public and business finance, according to the survey.

In order to rise up the rankings, IMD recommended the government continues its efforts in boosting non-oil sectors to diversify public revenues and increase non-oil GDP, develop human capital and increase labour participation rates for the Saudi male and female youth through implementation of the Human Capability Development Program.

"Continue reforms to restructure and streamline procedures and fees for licensing activities by adopting international best practices to enhance the business environment," was another recommendation.