Slowdown Confirmed
BNP Paribas | Oct 14, 2014 06:39AM ET
Slowing growth
After three years of strong growth (average annual GDP growth of 7.3% from 2010 to 2012), the slowdown which began in 2013 (to 3.8%) has been confirmed this year. The stagnation of oil production (which is worth around 20% of GDP) and the slower growth in public spending are the main reasons for this slowdown. Since 2013, public spending, which had risen by more than 10% per year since 2011, has grown at an annual rate of just 2% to 3% per year, meaning it has been stable in real terms. GDP figures for the second quarter of 2014 have confirmed the slower pace of growth.
Government spending rose by only 2.6% on an annualised rate in Q2 2014, compared to 4.2% in Q1 and 7.6% in Q2 013. After the sharp rises in current expenditure (wages and transfers) in 2011 and 2012, this has stabilised at a level more in line with expected trends in revenues. However, public sector investment spending remains high (particularly on infrastructure and housing). For 2014 as a whole, public spending is likely to increase by around 3% in real terms.
The first half of this year saw a recovery in oil sector activity (2.5% y/y), after the contraction of 1% seen in 2013. However, the latest production figures to be published (subject to subsequent adjustments) show a reduction of more than 0.4mb/d in crude oil in August, from an estimated total of 9.6mb/d. At an annualised rate this could indicate a reduction in oil sector activity of around 7% in Q3 2014, and assuming stable production in the final quarter, total production for the year could be down again, by around 1.1%.
■ Private sector is strong but constrained
The outlook for the non-oil private sector remains hard to determine. Looking at individual sectors gives a mixed picture, but the overall trend is towards a slowdown (construction, retail and financial services). Only manufacturing (excluding refining), which accounts for around 12% of GDP, showed an acceleration in Q2 2014, to 6.5% from 4.4% a year earlier. In more general terms the purchasing managers’ index (PMI calculated by Markit, with 50 marking the boundary between economic expansion and contraction) was well into positive territory, at 60.7 in August 2014. However, another indicator of business confidence paints a less positive picture. The Business Optimism Index (BOI), calculated by Dun & Bradstreet and published by NCB, is based on a survey of more than 450 companies in the non-oil private sector. Over the course of the third quarter of 2014, this index slipped 14 points to 36. Although much of this fall was due to seasonal factors, it is nevertheless its lowest level index since Q3 2009.
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It seems however that this is only a superficial contrast between these indices. There is little doubt about the strength of the non-oil private sector, which is tending to become increasingly autonomous in relation to the public sector. Real growth in this sector, which represents 60% of GDP (from 47% in 2004) has averaged 10% per year since 2010. The sector has benefited from strong domestic private sector demand, driven by significant increases in wages (in the public sector, where the majority of Saudis work) since 2011, and from bank lending. Saudi Arabia has seen some of the Gulf’s strongest growth in bank lending to the private sector, with annualised growth of more than 12% in Q2 2014.
However, although economic conditions are favourable, other factors are constraining businesses. The Nitaqat programme for the Saudisation of employment, introduced in 2011, has established new requirements for the private sector. Depending on the sector and the size of the company, a failure to meet the quota of posts held by Saudi nationals results in sanctions which can be extremely onerous for companies. For some sectors that make significant use of immigrant labour (such as construction), the effect on activity can be significant. According to the BOI survey, availability of skilled workers is cited by companies as the factor most likely to restrict the growth of their business (cited by 37% of respondents). The policy of Saudisation of employment could continue to hold back economic activity. However, it does also produce a reduction in unemployment which in the long run will help boost domestic demand. In 2013 the official unemployment rate was 11.5%, from 12% in 2012.
Fiscal uncertainties
Growth in public spending, which had provided considerable support to the economy since 2011, could suffer the consequences of less favourable conditions in the oil market in 2015. Given the downgrading of forecasts of global economic growth and the continued abundant supply of oil at a global level, expectations of oil prices in 2015 are moving downwards. We expect Brent crude to average USD100/b in 2015, from an expected USD106/b in 2014.
In 2015, fiscal receipts from oil (92% of total fiscal receipts) will trend downwards. Saudi oil production is the main variable of adjustment in the global oil market. After the fall in August, production could again be reduced in 2015 if prices remain below the target price for producer nations (around USD100/b for Brent crude). This fall in production – expected to be 3% – will have an effect on growth. In fiscal terms, lower prices and reduced production will produce a fall in total fiscal receipts of 4.7%. Against this background, we think it is reasonable to expect slower growth in public spending, which we expect to be around 2%. All in all there is likely to be a small fiscal deficit of around 0.1% of GDP.
Despite this, the position of Saudi Arabia’s public finances remains comfortable. Cumulative surpluses have allowed government debt to be reduced to a negligible level (2.7% of GDP in 2013), along with the build-up of a substantial stock of government assets, which were equivalent to 100% of GDP at around USD750bn at end-2013. Around 60% of these assets are in the form of deposits with the central bank. Even so, the vulnerability of the fiscal position to fluctuations in oil prices is tending to increase. Expenditure is relatively rigid, whilst receipts still depend nearly exclusively on the oil market. In addition, in the medium term, the continued growth in domestic consumption creates a threat to Saudi Arabia’s ability to maintain exports, and thus oil rents, at acceptable levels. The breakeven oil price for the budget has been rising constantly since 2010, and is likely to reach USD92/b in 2014. The gap to the market price remains wide (more than USD10/b) but has been narrowing due to government spending pressures.
It appears that we have left the years of strong growth behind us, and that medium-term prospects are now close to 4%. We expect real GDP growth to slow down to 3.6% in 2014 and 3% in 2015, principally as a result of a less favourable oil market, a less comfortable fiscal position and constraints (at least in the short term) in the labour market.
BY Pascal DEVAUX
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