IS SAUDI GROWTH IMMUNE FROM OIL PRODUCTION?
Oil Output Slows But Saudi Economy Grows
Years of solid efforts toward the diversification of oil-based economies in the Arabian Gulf region are finally paying off. The UAE has been at the forefront in terms of reducing its dependence on the oil sector, but the largest producer by far in the region, Saudi Arabia, has also started seeing the results of diversification.
In the first half of 2013, economic growth continued, despite the falling oil GDP in Saudi Arabia, which arguably holds the world’s second largest crude oil reserves. Recently, the Kingdom’s Central Department of Statistics and Information released GDP data for Q2 2013 showing a real growth of 2.7 percent year-on-year, compared with 2.1 percent in the first quarter and 5.5 percent in the second in 2012.
Without doubt, the figures suggest that Saudi Arabia’s economic growth has slowed, but this is mainly because of low oil output. And the sector matters the most because it contributes almost 50 percent to the $700-billion-plus economy.
However, Saudi-based research and investment firm, Jadwa Investment, views these recent statistics a little differently. It says, in a report shared with TRENDS: “Saudi Arabia’s second lowest quarterly growth in 2013, since the first quarter of 2011, is mainly due to falling oil output as non-oil growth picked up by 4.5 percent from 4.4 percent for the previous quarter and the same period last year.
“In terms of contribution to overall growth, the private non-oil sector was the main growth driver in the second quarter, contributing 2.4 percentage points (ppt). The government contribution accelerated to 1.1ppt compared with 0.6ppt in second quarter last year. Finally, the oil sector contribution was -0.8ppt owing to lower oil production,” reveals the report.
Jadwa’s Fahad Alturki says: “In line with our forecasts, the oil sector was the main drag on overall real GDP in the second quarter. At -3.7 percent year-on-year, the oil sector registered the weakest growth among all of the economy’s sectors, although the level of contraction slowed compared with – 6.3 per cent in the first quarter.
“This was heavily influenced by the move in oil production, which contracted by 4.7 percent year-on-year in the second quarter. As oil production gradually picks-up during the summer months, owing to rising domestic demand and increasing external demand on Saudi crude, the negative effect of oil reduction on overall GDP growth will decline in the coming quarters,” wrote Alturki in a recent research paper.
Besides the sad oil production story, the rest of Saudi economy posted visible growth. “Stripping out the oil sector, the economic growth ticked up to 4.5 per cent from 4.4 per cent in the first quarter. Private sector growth slightly slowed to 4.2 per cent year-on-year. The slow growth reflects both normalization of activity, as the impact of the 2011 fiscal stimulus gradually fades away, and as a result of introducing new and stricter labor market regulation,” says Alturki, adding: “Growth of non-oil public sector, however, accelerated to 5.5 per cent year-on-year. Most of this growth was sourced from higher government services, which accelerated to 6.4 per cent year-on-year.
“Elevated demand on government services is expected to maintain a firm public sector growth over the next few quarters, which will also be translated into higher non-oil revenues for the government.”
With the exception of the mining sector, all of the business sectors in Saudi Arabia registered a positive year-on-year growth in Q2 2013. Construction, wholesale and retail trade sectors, along with government services, were among the fastest-growing sectors. The growth of the construction sector slowed, compared with the first quarter, but still robust at 6.5 per cent year-on-year and higher than the four percent growth in the same period last year, says Jadwa Investment.
Slower growth, compared with the previous quarter, may reflect changes and the enforcement of corrective labor market regulation, as well as slower construction activity as the temperature rises. Alturki adds: “We expect the impact of changes in labor market regulation to be temporary, as the sector adjusts to this new norm.
“On the upside, the sector will benefit from vast activity in building infrastructure, commercial and increasingly residential projects.
“We expect year-on-year economic growth to improve in the third quarter. While the negative impact of changes in labor market regulation on private sector activity is likely to carry-over into the third quarter as we approach the end of the grace period in early November, both government spending and stabilizing oil output will balance overall economic growth.”
The clouds of slow oil production are bound to wither as crude prices have already spiked with the looming US-led military campaign against Syria. French lender Societe Generale said that oil might reach $150 per barrel, if strikes against Syrian spill over.
Traditionally, oil and gas demand rises during winter, especially in Western Europe and the Americas, and this would help mitigate the effects of the slowdown of oil in the first two quarters of this year.
Jadwa’s latest report reveals: “As growth in the oil production picks up in the coming months, the negative contribution to real GDP growth from the oil sector is expected to fade away.
In addition, high government spending will continue to support the non-oil economy. At the same time, year-on-year growth in bank lending remain positive, despite a recent seasonal slowdown, while business surveys point to further expansion of the private sector.”
Alturki adds: “With solid local fundamentals, but considerable uncertainty over regional instability, we maintain our forecast for real GDP growth for 2013 of 4.2 percent, down from 6.8 percent last year.”
The slow oil GDP growth in the first two quarters could be a motivating factor for public and private sectors in Saudi Arabia to look for ways to move further away from the dependence on the oil sector.
In a remark on Saudi economy, IMF says that strong private sector growth and government spending on housing and infrastructure projects are the two major drivers of the Kingdom’s economy.
The country’s economic outlook remains positive, says IMF mission chief for Saudi Arabia, Tim Callen: “The country should continue to take advantage of this opportunity to create jobs, address housing shortages, develop the small- and medium-sized enterprise sector and further strengthen the fiscal position.”
Even the slowdown in oil output is not a major cause of worry because the government has prudently used high oil prices to build substantial fiscal buffers, which provide plenty of scope to smooth government spending over the medium term in the event of a decline in oil prices, adds the IMF.
One of the major catalysts of Saudi’s economy would be its financial sector – further reducing its reliance on oil. In coming months, Saudi Arabia is planning to open its stock market, Tadawul, for foreign investors – it is by far the biggest bourse in the region, in terms of overall market capitalization of firms listed on the exchange. Once the market regulations are in place and foreign investment firms open shops in the Kingdom, the financial services sector would become one of the key components of the Saudi economy.
By Atique Naqvi | Dubai, UAE | Uploaded on the blog recently**
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| Saudi growth has been heavily dependent on crude oil. |
In the first half of 2013, economic growth continued, despite the falling oil GDP in Saudi Arabia, which arguably holds the world’s second largest crude oil reserves. Recently, the Kingdom’s Central Department of Statistics and Information released GDP data for Q2 2013 showing a real growth of 2.7 percent year-on-year, compared with 2.1 percent in the first quarter and 5.5 percent in the second in 2012.
Without doubt, the figures suggest that Saudi Arabia’s economic growth has slowed, but this is mainly because of low oil output. And the sector matters the most because it contributes almost 50 percent to the $700-billion-plus economy.
However, Saudi-based research and investment firm, Jadwa Investment, views these recent statistics a little differently. It says, in a report shared with TRENDS: “Saudi Arabia’s second lowest quarterly growth in 2013, since the first quarter of 2011, is mainly due to falling oil output as non-oil growth picked up by 4.5 percent from 4.4 percent for the previous quarter and the same period last year.
“In terms of contribution to overall growth, the private non-oil sector was the main growth driver in the second quarter, contributing 2.4 percentage points (ppt). The government contribution accelerated to 1.1ppt compared with 0.6ppt in second quarter last year. Finally, the oil sector contribution was -0.8ppt owing to lower oil production,” reveals the report.
Jadwa’s Fahad Alturki says: “In line with our forecasts, the oil sector was the main drag on overall real GDP in the second quarter. At -3.7 percent year-on-year, the oil sector registered the weakest growth among all of the economy’s sectors, although the level of contraction slowed compared with – 6.3 per cent in the first quarter.
“This was heavily influenced by the move in oil production, which contracted by 4.7 percent year-on-year in the second quarter. As oil production gradually picks-up during the summer months, owing to rising domestic demand and increasing external demand on Saudi crude, the negative effect of oil reduction on overall GDP growth will decline in the coming quarters,” wrote Alturki in a recent research paper.
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| Growth of non-oil sector has accelerated amid diversification drive. |
Besides the sad oil production story, the rest of Saudi economy posted visible growth. “Stripping out the oil sector, the economic growth ticked up to 4.5 per cent from 4.4 per cent in the first quarter. Private sector growth slightly slowed to 4.2 per cent year-on-year. The slow growth reflects both normalization of activity, as the impact of the 2011 fiscal stimulus gradually fades away, and as a result of introducing new and stricter labor market regulation,” says Alturki, adding: “Growth of non-oil public sector, however, accelerated to 5.5 per cent year-on-year. Most of this growth was sourced from higher government services, which accelerated to 6.4 per cent year-on-year.
“Elevated demand on government services is expected to maintain a firm public sector growth over the next few quarters, which will also be translated into higher non-oil revenues for the government.”
With the exception of the mining sector, all of the business sectors in Saudi Arabia registered a positive year-on-year growth in Q2 2013. Construction, wholesale and retail trade sectors, along with government services, were among the fastest-growing sectors. The growth of the construction sector slowed, compared with the first quarter, but still robust at 6.5 per cent year-on-year and higher than the four percent growth in the same period last year, says Jadwa Investment.
Slower growth, compared with the previous quarter, may reflect changes and the enforcement of corrective labor market regulation, as well as slower construction activity as the temperature rises. Alturki adds: “We expect the impact of changes in labor market regulation to be temporary, as the sector adjusts to this new norm.
“On the upside, the sector will benefit from vast activity in building infrastructure, commercial and increasingly residential projects.
“We expect year-on-year economic growth to improve in the third quarter. While the negative impact of changes in labor market regulation on private sector activity is likely to carry-over into the third quarter as we approach the end of the grace period in early November, both government spending and stabilizing oil output will balance overall economic growth.”
The clouds of slow oil production are bound to wither as crude prices have already spiked with the looming US-led military campaign against Syria. French lender Societe Generale said that oil might reach $150 per barrel, if strikes against Syrian spill over.
Traditionally, oil and gas demand rises during winter, especially in Western Europe and the Americas, and this would help mitigate the effects of the slowdown of oil in the first two quarters of this year.
Jadwa’s latest report reveals: “As growth in the oil production picks up in the coming months, the negative contribution to real GDP growth from the oil sector is expected to fade away.
In addition, high government spending will continue to support the non-oil economy. At the same time, year-on-year growth in bank lending remain positive, despite a recent seasonal slowdown, while business surveys point to further expansion of the private sector.”
Alturki adds: “With solid local fundamentals, but considerable uncertainty over regional instability, we maintain our forecast for real GDP growth for 2013 of 4.2 percent, down from 6.8 percent last year.”
The slow oil GDP growth in the first two quarters could be a motivating factor for public and private sectors in Saudi Arabia to look for ways to move further away from the dependence on the oil sector.
In a remark on Saudi economy, IMF says that strong private sector growth and government spending on housing and infrastructure projects are the two major drivers of the Kingdom’s economy.
The country’s economic outlook remains positive, says IMF mission chief for Saudi Arabia, Tim Callen: “The country should continue to take advantage of this opportunity to create jobs, address housing shortages, develop the small- and medium-sized enterprise sector and further strengthen the fiscal position.”
Even the slowdown in oil output is not a major cause of worry because the government has prudently used high oil prices to build substantial fiscal buffers, which provide plenty of scope to smooth government spending over the medium term in the event of a decline in oil prices, adds the IMF.
One of the major catalysts of Saudi’s economy would be its financial sector – further reducing its reliance on oil. In coming months, Saudi Arabia is planning to open its stock market, Tadawul, for foreign investors – it is by far the biggest bourse in the region, in terms of overall market capitalization of firms listed on the exchange. Once the market regulations are in place and foreign investment firms open shops in the Kingdom, the financial services sector would become one of the key components of the Saudi economy.
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