SAUDI MOVES BEYOND COVID-19 AS BUSINESS ACTIVITY REBOUNDS

The Saudi economy is signalling a strong turnaround, suggesting that lacklustre data from the second and third quarters are not reflective of the rapid economic improvements that are under way.

It is a story being played out in many parts of the world where global economic indicators are lagging the on-the-ground surge in business activity.

Third quarter data for Saudi Arabia suggests a 4.2% decline in real GDP year on year, according to the General Authority for Statistics. This was better than the 7% decline in the second quarter.

Seasonal adjusted GDP for the third quarter was 1.2% higher quarter on quarter, suggesting an upturn in the economy as businesses look to resume their operations.

November data for purchasing managers index (PMI) shows the economy is picking up pace. November PMI survey data from IHS Markit pointed to an increase in the kingdom’s non-oil economy, driven by a steep rise in sales and a bounce in business confidence as the impact of the COVID-19 pandemic continued to ease.

Output growth strengthened to a 10-month high, while business activity saw an increase in sales.

"A third successive rise in the Saudi Arabia PMI pointed to an economy getting back on its feet in November. Supported by output and new business growth reaching 10-month highs, the data suggests a strong end to the year for the non-oil private sector,” said David Owen, economist at IHS Markit.

The PMI Index jumped to 54.7 points in November, compared to 51 in October. A figure above 50 indicates overall improvement of the sector. The index has now stayed above the 50-point mark for three months in a row, indicating a sustained recovery from COVID-19 induced lockdowns.

“Non-oil private sector output expanded at the fastest rate in 10 months during November, as panellists highlighted an improvement in market conditions and a steeper increase in new work. Both domestic and foreign sales rose on the month, marking only the second upturn in new export orders since February,” Markit said.

Most crucially, hiring intentions of companies turned positive for the first time since January, while business confidence also improved, reaching the highest seen in 10 months, on the back of announcement of vaccines.

New construction projects are also being awarded to stimulate economic activity. In November, Qiddiya Investment Company said it has now awarded contracts worth SAR 2 billion to develop the kingdom’s 366-square-kilometre gigaproject focused on entertainment, sports and the arts near the capital city of Riyadh.

All the contracts were awarded to Saudi companies, which should boost local supply chains and create jobs.

The most recent contract was a three-year agreement to build major roads and bridges on the upper plateau of the site to Haif & Freyssinet – a joint venture contract between the two local firms. The contract was valued at SAR 1 billion.

The developer has already awarded contracts for mass grading, roads and bridges, site security, and other enabling works to various Saudi companies such as Haif Bin Mohammed Bin Abboud Alqahtani and Partners For Trading Contracting Co; Freyssinet Saudi Arabia Co Ltd; Alkhorayef Water and Power Technologies; Saudi Pan Kingdom For Trading And Contracting (SAPAC); Shibh Al Jazira Contracting Company (SAJCO); and Abdul Ali Al Ajmi Company.

The focus on domestic companies for new projects will be vital for the kingdom’s economic recovery.

Reforms are also underway in vital Saudi entities to ensure that they are well positioned for the economic upturn.

In November, Saudi Electricity Company said it had agreed with the Ministry of Finance to reclassify its net government liabilities, as part of the recently approved sector-wide financial, structural, and regulatory reforms to restructure the kingdom’s electricity sector.

“According to the terms of the financial agreement, SEC’s net government liabilities will be converted into a perpetual deeply subordinated equity-like financial instrument. This conversion is considered non-dilutive and will therefore have no impact on the company’s existing shareholders’ stakes,” the SEC said.

Through the agreement, in addition to the cancelling of the government fees imposed on the company, SEC will be better able to fulfil its obligations and satisfy its dues, which will in turn enhance its financial position.

“The agreement and reforms will further improve SEC’s ability to fund projects and enable the company to execute on its strategy to contribute to the development of a stronger, more sustainable, and diverse electricity sector,” the SEC said. “It will also enable SEC to distribute dividends to all of its shareholders.”

Clearly, the SEC is a key plank of the economy as its ambitious plans to expand power capacity will touch every aspect of the economy. The timely restructuring of the company will ensure it is well positioned for stable growth.