The paradox: Saudi's non-oil sector to grow, but economy remains stimulated by oil spending
Saudi Arabia’s very high government spending remains the main stimulus to the real economy. Also, oil revenues expected to remain sufficiently high to maintain and support business and investor confidence, the Riyadh-based Jadwa Investment said in its new report released on Tuesday.
“ We believe that progress on awarding contracts and project implementation has been stepped up compared to last year. The HSBC Purchasing Manager Index (PMI) points to strong expansion in private non-oil sector activity. Other data on private consumption, cement production, bank lending, transport and manufacturing activity all point to a robust nonoil growth,” Jadwa said.
Nonoil growth of 4.5 percent year-on-year in the first half of the year was little changed compared with the same period last year. Lower- than-expected growth of leading private nonoil sectors (retail, construction and utilities) in the first half was partly offset by a strong expansion of government services. Enforcement of labor market regulation has weighed on the growth of both the retail and construction sector in the second quarter while at the same time increased demand on government services.
“For second half of the year, we expect the nonoil sector growth to pick up pace compared to the first half as the private sector adjust to new labor market norm. We, however, slightly reduce our forecast for the nonoil private sector from 6.3 percent previously to 6 percent in 2013,” Jadwa said.
The report said monthly data points to very strong growth in consumer spending. The value of cash withdrawals from ATMs in the first seven months of this year is 8.8 percent higher than for the same period of last year; for point of sale transactions, the growth is 22 percent. In fact, both indicators registered all-time highs in the first seven months of this year.
As a result, the retail sector, which includes wholesale, restaurants and hotels, was one of the fastest growing sectors in the first half of the year, expanding by 6.6 percent year-on-year, though growth was lower-than-expected as the sector adjusts to changes in the labor market.
On the upside, increase in nominal wage and strong population growth will keep the retail sector growth elevated for the rest of the year. However the impact of the strong retail sector on the rest of the economy will be relatively mild, as much consumer spending is on imported goods; the volume of consumer goods imports through the ports over the first five months of this year is 6 percent higher than in the same period of 2012.
Data also point to healthy growth in the construction sector, which rose by 6.6 percent year-on-year in the first half this year. Cement production over the first eight months of the year was 8 percent higher than in the same period of last year, despite seasonal fall recently. At the same time, the pace of awarded projects is expected to pick up this year.
According to Middle East Economic Digest, the value of projects to be awarded this year will increase by 40 percent year-on-year, reaching $70 billion; virtually all of these involve some element of construction. The government has also recently approved a new mechanism to step up project monitoring process to ensure their completion on time which should provide another boost to the sector. Furthermore, with the government committed to a substantial support to the residential housing sector over the next few years, construction should remain one of the fastest growing sectors. Recently a royal decree was issued to facilitate residential real estate development by enabling the Ministry of Housing to award both developed lands and interest-free home-loans to Saudi nationals. At the same time, the Real Estate Development Fund have stepped up its lending activity in the last two years with an outstanding loans of SR94.5 billion at the end September last year compared with SR77.6 billion at the end of 2010.
The Jadwa report said transport, storage and telecoms sector recorded a lower-than-expected growth of 2.6 percent in the first half. The sector will also benefit from the completion of a number of transport projects this year including phase one of the Millennium Seaport in King Abdullah Economic City with a capacity of 3.8 million twenty-foot-equivalent-units per year as well as a number of railways projects that will see the light this year.
Growth of the telecoms sector, however, seems to be slowing, the report said. The number of mobile subscribers fell by 2 percent in the first quarter of 2013 with mobile penetration falling to 177 percent. The contribution of Internet and broadband services remains positive and with penetration at 55 percent and 49.6 percent, respectively, there is more room for growth.
The Jadwa report said strong performance of private sector should feed into higher growth for the finance sector.