Business conditions improve in Saudi Arabia, GDP to retain strong growth rates
Saudi's leading indicator purchasing manager's index (PMI) which measures manufacturing and services sectors' performance rose to 58.3 points in August 2012 from 58.1 points in July 2012. The seasonally adjusted index remains well above the 50.0 point mark separating growth from contraction. This suggests business conditions in Saudi's non-oil sector are resilient buoyed by strong domestic demand.
New order growth sub-index rose to 68.7 points in August 2012 from 66.3 points in July 2012 due to greater sales, marketing efforts and improving market conditions. Input price growth rose to 56.6 points in August 2012 from 55.8 points in July 2012. Overall input price inflation was slightly stronger than July's seven-month low and buoyed by growth of both purchasing and staff costs. The cost of raw materials pushed higher by stronger demand. Meanwhile, output price growth fell to 48.5 points in August 2012 from 51.6 points in July 2012. The survey noted competitive business environment pressures had induced some firms to lower their selling prices.
Similarly, other leading indicators such as July's banking data is pointing towards an upward momentum. Private sector credit growth rose significantly to 15.3 per cent y-o-y in July 2012 from 13.9 per cent y-o-y in June 2012. Private sector credit dominated credit growth in July, underpinned by the growth of government deposits as the government used some of its savings to indirectly support the corporate and consumer sector. Government-influenced consumption will be the major driver, helped by wage and pension hikes. Industrial output is also gaining from government demand and the social housing contracts. Large foreign asset holdings (over $590 billion) will help shield the country from a downturn.
The employment growth sub-index slowed in August 2012 to its slowest pace in five months. Nonetheless, with implementation of the "Nitaqat" (a Saudiisation scheme), we expect unemployment among the Saudi nationals to reduce in the coming years. Nitaqat which was launched in phases from September 2011, classifies companies according to a traffic-light system. The best companies-those categorised as "green"-are those that have complied with the government's "Saudiisation" quotas and are thus allowed to poach workers from the less compliant "yellow" and "red" companies without having to secure the approval of their original visa sponsor.
On August 15, the Ministry of Labour said that it would launch an "advanced Nitaqat" scheme, which, rather than, as previously, being focused on job quotas for Saudi nationals, will instead aim to raise the salaries of Saudi employees. In addition, a few days earlier, it said that it was expanding the scope of the programme to a number of other sectors, including transport of goods and people outside of cities.
In addition, the Saudi government has approved the hiring of 1,000 labour inspectors to ensure Nitaqat compliance. These new announcements show the determination of the Saudi government to press ahead with Saudiisation and the nitaqat programme had already resulted in the employment of 250,000 Saudis (including 54,000 women).
Saudi ranks 12th among 183 economies in World Bank's Doing Business (DB) 2012 report in terms of overall ease of doing business. Saudi's rank for starting a business improved significantly to 10th in DB 2012 from 14th in DB 2011. Saudi made starting a business easier by bringing together representatives from the Department of Zakat and Income Tax and the General Organization of Social Insurance at the Unified Center to register new companies with their agencies. For dealing with construction permits category, Saudi's rank improved to 4th in DB 2012 from 6th in DB 2011. Saudi made dealing with construction permits easier for the second year in a row by introducing a new, streamlined process.
At the same time, Saudi's oil sector is still faring well on the back of increasing crude oil production. Saudi's monthly crude oil production remained high at 9.9 million bpd in August 2012 (July 2012: 9.9 million bpd). Its monthly crude oil production remained the highest as compared with other OPEC countries. We believe the oil sector (contributes 50 per cent of GDP) will remain resilient in the coming years supported by Saudi Aramco.
Given Saudi's recent robust economic performance, the International Monetary Fund (IMF) provided an extremely positive take on Saudi's economic prospects in its latest Public Information Notice (published on August 7). With leading indicators pointing towards an upward momentum, we forecast Saudi's GDP growth to remain strong at six per cent y-o-y in 2012 (2011: 7.1 per cent y-o-y) buoyed by both oil and non-oil sectors. Government-influenced consumption will be the major driver, helped by wage and pension hikes. Industrial output is also gaining from government demand and the social housing contracts. Furthermore, large foreign asset holdings will help shield the country from a downturn.