Saudi Arabia upbeat about 2014's growth prospects
Saudi Arabia has been one of the best performing G20 economies in recent years with real GDP growth averaging 5.9 percent per annum during 2008-13. The authorities recently announced their 2014 state budget plan, projecting another expansionary budget to continue the process of diversifying the economy. Based on a conservative oil price assumption of $80 per barrel, government revenues and expenditures are expected to be $228 billion in 2014. The budget includes substantial additional outlays for education, health and infrastructure, despite expected declines in oil revenues. The nonoil private sector is expected to be the key driver of growth in 2014, boosted by large public sector infrastructure investment and the rapidly growing population.
The KSA Ministry of Finance (MoF) budget announcement included preliminary macroeconomic data, which provide some insight into the authorities view on economic performance for 2013 as well as prospects for this year. They suggest that overall economic growth slowed to 3.8 percent year-on-year in 2013 owing to a decline in oil output. Oil production accounts for just under half of GDP. Production was raised during 2011-12, mainly to make up for lower exports from elsewhere in MENA. However, it was cut back slightly in 2013 as production recovered in other MENA countries.
Meanwhile, nonoil growth grew by a robust 5.0 percent year-on-year in 2013 as consecutive years of elevated government spending lifted business and consumer confidence and banks’ comfort in lending. In terms of sectors, the budget announcement indicated that the fastest growing sectors in 2013 were the construction (8.1 percent), the transport and communication (7.2 percent), as well as the retail sector (6.1 percent).
The nonoil sector is expected to continue growing strongly this year reflecting government-led infrastructure projects, such as the Riyadh Metro and a high speed inter-city rail network currently under construction. Furthermore, the authorities are investing $86 billion in building the new King Abdullah Economic City in an attempt to diversify the economy away from hydrocarbons into a knowledge-based economy. On the whole, the value of projects planned or underway was up over a third in 2013 compared with 2012, according to MEED projects data. Spending by government-owned firms seems set to continue at a robust rate and will continue to offer plenty of opportunities for local contractors. In particular, Saudi Aramco has major projects underway in the refining and petrochemical sectors, which will extend the economy’s industrial base further.
What’s more, the budget announcement stated that the government will continue to allocate funds via specialized credit institutions with $22.8 billion being disbursed this year in order to finance industrial projects and thus to support and boost non-oil development. A case in point is the Saudi Industrial Development Fund (SIDF) which has recently approved 19 loans valued at $747 million for 15 new industrial projects and the expansion of four existing projects.
Overall, the near-term KSA macroeconomic outlook is positive with a small recovery in oil production lifting real GDP growth to 4.4 percent in 2014. Leading indicators such as point of sales transactions and the Purchasing Managers Index suggest that the private non-oil sector is continuing to grow strongly, and large projects in transportation infrastructure and the mining sector should help underpin a pick-up in private sector growth this year. Indeed, the latest PMI reading for the month of December (58.7 versus 57.1 in November, whereby a reading above 50 indicates expansion) signaled a sharp rise in activity and new orders of non-oil producing firms, with the pace of expansion at an eight month high.
Going forward, there is a small downside risk of lower global oil demand on slow economic growth, particularly as tapering of Quantitative Easing affects growth in emerging markets. Having said that, KSA fiscal buffers are large and the authorities have space to smoothen spending over the medium term in the event of a significant oil price drop.