The slowdown in Saudi Arabia’s economy as a result of the collapse in oil prices since 2014 shows no sign of letting up. Saudi Arabia’s first-quarter GDP growth was its slowest in three years, while the non-oil sector recorded its worst performance in a quarter of a century. The kingdom’s decision makers face a tricky task in marrying necessary spending cuts with a stated aim to better diversify the economy.
Oil, of course, is Saudi Arabia’s lifeblood, the receipts from which the government has historically used to provide subsidies and services to its people and comfortable jobs to a large number of its citizens as well. The sustained slump in crude prices prompted Deputy Crown Prince Mohammed bin Salman to instigate a savage reduction in state expenditure—estimated at 15 per cent last year and with expectations for similar cuts this year. Prince Mohammed also unveiled Vision 2030 (also known as the National Transformation Programme) in June, including in it many ambitious aims largely focused around weaning Saudi Arabia off its oil dependence. These include increasing direct foreign investment from 30 billion riyals ($8 billion) to 70 billion riyals and creating 450,000 private sector jobs by 2020.
First-quarter GDP was 641.5 billion riyals, up 1.5 per cent from a year earlier, according to data from the General Authority for Statistics, the smallest year-on-year increase since early 2013. The oil sector expanded 5.1 per cent to 273.7 billion riyals in the first quarter as Saudi Arabia ramped up production to try to win market share from higher-cost producers. But the non-oil sector shrank 0.7 per cent to 365.6 billion riyals, its weakest in about 25 years according to London’s Capital Economics, a decline that was largely due to a 2.6 per cent contraction in the government sector following the spending cuts.
First-quarter GDP data “highlights the impact fiscal austerity is already having on the economy. And more timely data suggest that growth has weakened further at the start of Q2,” Capital Economics wrote in a note. “All of this supports our view that the kingdom will record very weak, if any growth, this year.”
Investors seem to take a similarly gloomy outlook, with Saudi’s share index down 28 per cent since the start of 2015. “The Deputy Crown Prince understands what needs to be done in order to overhaul the economy and reduce Saudi Arabia’s reliance on oil, but this is extremely difficult to do at the same time the government is cutting spending as it tries to place the economy on a firmer financial footing,” says Jason Tuvey, an economist at Capital Economics.
The austerity measures actually served to increase oil’s share of total GDP to 42.7 per cent in the first quarter versus 41.2 per cent a year earlier. Another NTP target is to triple non-oil revenue to 530 billion riyals in 2020 from 163.5 billion riyals. “The long-term plan is to have an increased contribution from the non-oil sector. Right now, what we’re seeing is the immediate impact of oil price volatility but as things start to stabilise and the NTP gains traction I think you will see a bigger contribution from the non-oil sector,” says Asim Bukhtiar, head of research and investment advisory at Saudi Fransi Capital. “The broad outline of NTP has been disclosed but the exact details are still to be announced. Once people have greater visibility as to what the new economic environment will look like there will be greater confidence among businesses to spend again.”
Broad money supply has declined over the past 12 months, showing the economy is tightening. This is having a knock-on effect on Saudi’s retail sector—long a favourite for investors seeking exposure to domestic consumption—according to Anees Moumina, chief executive of Jeddah-based SEDCO Holding Group. “The retail sector has become more challenged. Consumers are being more careful about what they’re buying,” says Moumina. “The retail sector reflects consumer confidence. Over the past decade it has achieved annual growth of nearly 10 per cent as banks developed retail credit products for consumers, who hadn’t previously used them much.”
Consumer confidence is weak compared with 2015, says Paul Gay, chief financial officer of dairy firm Almarai. He forecasts Saudi’s food sector will grow in the mid-level single digits to the end of 2017. “Fortunately, our business model is by definition very resilient since we are operating with relatively low price and basic food and beverage products compared to other discretionary spend items like computers, mobile phones, furniture et cetera,” Gay says.
Saudi’s current account deficit was 67.4 billion riyals in the first quarter of 2016, the Saudi Arabian Monetary Agency (SAMA) estimates, up from 44.8 billion riyals in the prior-year period. The deficit should narrow thanks to dampened demand for imports and a gradual rise in energy prices.
Total bank deposits fell 1.1 per cent to 1.59 trillion riyals in the first half of 2016, the first such downturn in many years according to Fitch Ratings, while SAMA’s balance sheet showed its total foreign assets were 2.13 trillion riyals, down 15.5 per cent from a year ago. “Government and government-related deposits are highly concentrated and withdrawals can expose banks to liquidity pressures,” a Fitch note states, giving Saudi Arabia’s banking sector a negative outlook. “Pressure on state oil-related revenues has triggered some withdrawals of liquidity.”
Yet bank earnings have been decent despite these difficulties, which include an increase in the three-month Saudi interbank offered rate to 2.073 per cent. National Commercial Bank and Al Rajhi Bank—Saudi Arabia’s two largest lenders by assets—reported second-quarter profit rises of 3.2 and 5.7 per cent respectively. Other major lenders including Samba Financial Group, Riyad Bank, Saudi Hollandi Bank and Saudi British Bank posted second-quarter profits that ranged from -1.4 per cent to +1.6 per cent versus a year earlier.
“Bank results have held up reasonably well, but as a sector the share performance has been under a lot of pressure along with the rest of the market—there’s expectation that bad news is imminent and it’s just a matter of time when this hits banks’ P+L [profit and loss] and balance sheets. It’s very possible we will start seeing that over the next two to four quarters,” says Saudi Fransi’s Bukhtiar. “The issue with banks is that their loan-to-deposit ratio has pretty much hit the maximum so unless SAMA increases loan-to-deposit limits it’s really hard to see where further loan growth will come from, especially as liquidity dries up.”
Copyright: UMS International Fz LLCTheme