ECONOMY

ROBUST ECONOMIC GROWTH BUOYS CONFIDENCE IN SAUDI

The Saudi economy remains strong in the first quarter of this year.

Latest data from the General Authority for Statistics showed real GDP increased by 3.8% in Q1 2023 compared to the same quarter in 2022.

Non-oil activities grew 5.4% during the period versus the year before, while government activities rose 4.9%, and oil activities expanded 1.4%. Seasonally adjusted real GDP fell 1.4% in the first quarter of 2023 compared to the fourth quarter of 2022.

The kingdom was the fastest growing G20 economy in 2022, expanding 8.7% as a result of strong oil production and a 4.8% non-oil GDP growth driven by robust private consumption, and non-oil private investment including giga projects. Wholesale, retail trade, construction, and transport were the main drivers of non-oil growth.

The International Monetary Fund (IMF) forecast non-oil growth in Saudi Arabia to rise above 5% in the first half of 2023.

“Non-oil growth momentum is expected to remain strong,” the IMF said in its latest report on the kingdom. “While the April 2023 OPEC+ production cuts would reduce overall real growth to 2.1% in 2023, non-oil growth is expected to average 5% in 2023 and remain above potential as strong consumption spending and accelerated project implementation boost demand.”

More crucially, the IMF has noted that risk to the economy are balanced, witht higher oil prices — as expectations of strong oil demand for the rest of the year persist — leading to accelerated structural reforms and investment could spur growth.

“Conversely, too rapid a rise in non-oil investment could further raise domestic demand, thereby adding pressure on prices and external accounts,” the IMF noted, noting that lower oil prices due to subdued global activity represent a key short-term risk.

VISION 2030 A KEY DRIVER

Vision 2030 reform agenda remains a key driver towards a productive and green economy.

“A mid-way stocktaking of the objectives set under Vision 2030 has identified progress on digitalisation, the regulatory and business environment, female labour force participation, and higher private sector investment — in some cases with targets set for 2030 already surpassed,” the IMF noted.

The authorities’ focus on harnessing human capital through the Human Capital Development programme, streamlining of multiple fees, higher access to finance, a new investment law, and stronger governance would further enhance private sector growth and total factor productivity.

The IMF also lauded the country’s robust banking system, noting in particular the strength of the aggregate capital adequacy ratio, and profitability that surpassed pre-pandemic levels.

Additionally, the non-performing loan (NPL) ratio is low and shows a downward trend. Although the growth in mortgages has recently slowed down, there is still strong demand for project-related and consumer loans. This helps counterbalance the impact on profitability caused by rising funding costs associated with higher interest rates and an increased share of time and saving deposits in banks' liabilities.

 

BUSINESS SENTIMENT

The non-oil private sector continues to gain strength in operating conditions in May, amid rising market demand and a steep increase in economic activity, according to the latest Purchasing Managers' Index (PMI) from S&P Global.

“Demand strength underlined further uplifts in output, employment and purchasing , with staff levels rising at the joint-fastest rate since January 2018,” S&P said, adding that strong wage pressures meant that firms' output prices rose sharply in May, with the pace of inflation accelerating to the highest level in nearly three years.

TSignificant increase in new orders was witnessed in May by non-oil private sector businesses. This growth followed a previous surge in April, which was the highest in eight and a half year. Although the rate of expansion slowed slightly, there was a renewed increase in sales from foreign clients. Survey participants often attributed the rise in new orders to improved economic conditions, as well as increased travel, tourism, and business investment.

Furthermore, activity levels in May showed a notable rise, although the rate of expansion was lower compared to previous months in 2023. Reports indicated that suppliers responded well to clients' requests for faster deliveries, resulting in a strong improvement in supply chains.

So far, the strong growth has a moderate impact on inflation, compared to other parts of the world where central banks are fighting high inflation. The IMF expects headline inflation to be well-managed.

Despite the presence of inflationary pressures from a tightening labour market and a thriving non-oil economy, the average Consumer Price Index (CPI) is projected to be 2.8%, only slightly higher than in 2022, the IMF projects. This is primarily due to the positive effects of a strong curre inflationary impact.