Is the Saudi economy going to be unpredictable in H2?
Saudi Arabia’s economy will start gathering pace from the second half of the year, as the non-oil economy adjusts to the labour market initiatives and base effects turn favourable in 2015, a report said.
The Saudi economy appears to have weathered reasonably well the impact of the labour market reforms introduced in November 2013, added the Bank of America (BofA) Merrill Lynch Global Research report.
High frequency data suggest a first-quarter slowdown, likely driven by expatriate worker outflows, while the non-oil economy gradual pick-up is expected be concurrently accompanied by a fading boost from the non-oil sector, it said.
Saudi Arabia’s real GDP expanded by 4.7 per cent year-on-year in the first quarter (Q1) of 2014, down from an upwardly revised 5 per cent year-on-year in the fourth quarter of 2013, the report highlighted.
Robust oil expansion boosted headline growth by 1.1 percentage point (ppt). Non-oil real GDP growth slowed down to 4.4 per cent year-on-year, from 5.5 per cent in 4Q13. This was largely due to the non-oil private sector, which grew by 4.4 per cent year-on-year, down from a pace of 6.0 per cent in 2013, the research report said.
This was the slowest pace for over a decade. Growth in the government non-oil sector expanded further to 4.1 per cent year-on-year, but a much stronger boost is not expected.
Slowdown was most visible in the wholesale, retail trade and construction sectors, which grew by 3.8 per cent year-on-year and 5.6 per cent year-on-year in Q1 2014, from 6.5 per cent year-on-year and 9.9 per cent year-on-year in Q4 2013, respectively.
After a trough in Q1 2014, July 3mma point of sales data rebounded to 17 per cent year-on-year, below the 20 per cent year-on-year average level in 2013, but still suggesting that consumer spending appears to have held up reasonably well against any expatriate worker outflows, according to the BofA Merrill Lynch Global Research report.
The government’s dominant position in the Saudi economy has put it in a strong position to support the consumer, through price subsidies, public sector employment, frequent wage increases, inflation alleviation plans, introduction of unemployment benefits, renewed Saudization drive and access to a pool of subsidized financing at Specialized Credit Institutions (SCIs).
Over the past three years, the government has increased public sector employment and wages, increased SCI lending, and its labour policies have led to an increase in Saudi employment and wages in the private sector.
The Saudi unemployment rate stood at 11.5 per cent in the fourth quarter of 2013, though the recent increase is likely distorted by the introduction of job-seeker registration, the report said.
The negative near-term implications of labour market reforms are mitigated by the fact that the eventual replacement of lower-level expatriate labour by higher-paid Saudi labour should prove supportive for consumption trends once the dust settles.
This is particularly so given the higher propensity to save and remit of the lower level expatriate labour, which is foregone domestic consumption. Saudi Arabia is the third largest outward source of remittances in the world with annual remittances of roughly 4 per cent of GDP. Favourable demographics and low leverage remain supportive of the Saudi consumer.
Leverage is among the lowest in GEM with consumer credit standing at c16 per cent of GDP at end-2013 (including SCI credit) versus an average of 24 per cent of GDP in our GEM sample. Recent credit trends have been subdued, but we see a healthy rebound as likely, including through real estate finance as the new mortgage law is implemented and demographic trends increase the demand for housing.
The Saudi consumer has grown strongly over the past decade, but in our view the potential implied by the favourable demographics has not been fulfilled. We think a range of structural weaknesses centering on the segmented labour market could cap growth over the long term.
The failure of the labour market to accommodate the confluence of a large youthful population and income disparities resulted in large public sectors and low labour participation rates, particularly among women.
However, structural long-term reforms are being implemented through training programs, education reforms and a social safety net, though more are needed, in our view. Still, a starting income per capita base much lower than its GCC peers allows room for catch-up and convergence potential, according to the BofA Merrill Lynch Global Research report.
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