The economic recovery is gathering pace mostly due to OPEC’s decision to increase oil production in order to keep markets adequately s...

Saudi Arabia Outlook Improves August 2018

  • The economic recovery is gathering pace mostly due to OPEC’s decision to increase oil production in order to keep markets adequately supplied and high oil prices, which have stoked activity in the all-important oil sector. Moreover, the recovery is broadening as the impact of the VAT implemented in January fades, and gains from the recovery in the oilsector are slowly trickling down to the rest of the economy. The nonhydrocarbon PMI hit a six-month high in June, while credit growth and foreign reserves improved in Q2. Higher production and oil prices are also translating into an improvement in the government’s fiscal position and the current account balance, which recorded a healthy surplus in Q1. On the flip side, the government’s Saudization policy, which is expelling foreign workers, could create labor shortages in some sectors, while the crackdown on corruption implemented last year is deterring investment and spurring capital outflows. Rising oil production and higher prices for the black gold will fuel this year’s economic recovery. However, the VAT implementation that disrupted activity at the outset of the year, persistent regional threats and domestic political unrest will weigh on growth this year. FocusEconomics Consensus Forecast panelists expect growth of 1.7% in 2018, which is up 0.1 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.3%. Inflation fell from 2.3% in May to 2.4% in June. A relatively strong currency and firms cutting prices to spur sales are exerting downward pressure on inflation. Panelists project that inflation will average 3.3% in 2018 before moderating to an average of 2.4% in 2019. The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003. That said, the currency has had a de facto peg to the greenback since 1986. To defend the currency peg against the USD, the Saudi Arabian Monetary Authority hiked its repo and reverse repo rates by 25 basis points on 13 June following a similar decision by the U.S. Federal Reserve on the same day. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2022.

REAL SECTOR | Non-oil PMI jumps to six-month high in June The Purchasing Managers’ Index (PMI) sponsored by Emirates NBD and produced by IHS Markit rose from 53.2 in May to 55.0 in June. June’s print represented the highest reading so far this year. Therefore, the index remains above the 50-threshold that indicates expansion in business activity in the non-oil private sector. June’s increase was driven by stronger output growth and a healthy expansion in new orders. Solid growth momentum translated into higher backlogs of work. Despite the overall improvement, job creation increased only marginally. On the price front, higher prices for raw material boosted input prices faced by Saudi companies. That said, output charge inflation declined due promotional activities in June.

“The rise in the headline PMI to the highest level this year reflects a strong recovery in new orders (including export orders) and output. Firms had been anticipating this for several months, as reflected in the very strong ‘future output’ readings since February. It isn’t surprising then that the future output index declined sharply in June, with most firms now expecting their output to be relatively stable over the next twelve months.”

- Khatija Haque, Head of MENA Research at Emirates NBD

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