Saudi Arabia Year in Review 2013

Strong fundamentals underpinned by the hydrocarbons industry and increasing private sector activity point to sustained expansion for Saudi Arabia in 2014, but the economy is showing signs of slowing as the impact of the government’s stimulus package tapers off.

According to the Central Department of Statistics and Information, year-on-year (y-o-y) growth for the third quarter was 3.1%, up on the 2.7% for the previous three months, but short of the 5.7% recorded for the same period in 2012. The IMF forecast in mid-December that the Kingdom’s annual GDP growth would hit an overall 3.6% in 2013, to be followed by 4.4% in 2014, thanks to increased activity in the non-oil sector.

One of the reasons for the reduction has been the scaling back of the nearly-$800bn investment and spending scheme launched in the wake of the global financial crisis and aimed at underpinning growth and strengthening infrastructure, industry and social services. The reduction in capital works and investments will likely mean a slowing across a number of areas of the economy, including construction, though that sector enjoyed an uptick in activity in the third quarter, growing by 5.7% y-o-y.

The energy sector posted growth of 3.1% y-o-y for the same period, rebounding from a 3.7% contraction in the second quarter, while the non-oil component of the economy grew by 3.3%, somewhat slower than the annualised 4.2% of the preceding three months.

Possible challenges ahead for hydrocarbons

After pumping some 10m barrels per day (bpd) through the third quarter, Saudi Arabia reduced output to 9.75m bpd in October, dropping to 9.45m in November.

This trend could continue into 2014, as the expected return of Iranian crude to international markets is likely to reduce demand for Saudi oil. With addition supply from Libya possible, international prices could come under pressure in 2014.

Another sign that the pace of growth has reduced comes from the banking sector. According to data issued by the Saudi Arabian Monetary Authority at the end of November, outstanding loans to the private sector increased 13% y-o-y in October, the smallest change since the middle of 2012 and the sixth straight month of a decline in the rate of growth.

While the economy is cooling, inflation has been edging up, rising to an annualised 3.1% as of November, an early December report from the Central Department of Statistics showed, with the cost of living climbing on the back of increased housing, utilities and food prices. With suggestions that the government may seek to rein in some of its energy subsidies, prices could rise further in the new year.

In particular, authorities may look to reduce fuel and electricity subsidies, which are equivalent to around 10% of GDP, according to the UN. Subsidised prices are not only costly to the state, they also encourage over-use, reducing the amount of hydrocarbons available for export and as inputs for the industrial sector.

New labour policies

One reason for the cooling of the Saudi economy may be Riyadh’s policy of reducing the number of unskilled expatriates in the workforce. The government announced plans to lessen the economy’s reliance on foreign labour early in 2013. This has affected some sectors that rely heavily on foreign labour, with growth down in the hospitality, retail trade and tourism industries, along with transport and storage.

However, the policy appears to be paying some dividends. In early December, Adel bin Mohammed Fakeih, the minister of labour, said more than 250,000 nationals had found jobs since the new labour law went into effect. This surge took the number of Saudis working in the private sector to more than 1m.

Looking forward, 2014 is likely to be a year of solid if unexceptional growth for Saudi Arabia, with the energy sector set to perform its role as the mainstay of the economy, despite the challenges it is expected to encounter. Other sectors should recover from the difficulties experienced in 2013, and domestic demand is likely to remain strong. Most estimates put growth in 2014 at a percentage point or more above the roughly 3.5% tipped for 2013, a good sign for the economy.

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