Saudi economy to grow 4 percent in 2014

The Saudi economy is forecast to moderately grow at 4 percent in 2014 as real GDP growth will remain 3.8 percent, Bank of America Merrill Lynch said in its MENA Equity Strategy report for the month of July this year.

The “moderate upside potential” is premised on the expectations that the impact of the labor market reforms on the non-oil economy will start easing from the second half of this year, the report said, adding the belief that the boost from the oil sector will concurrently moderate due to base effects. “This should leave the annual headline GDP growth hovering around the 4 percent mark,” the report noted.

On consumer dynamics, the report said Saudi consumption growth has been among the strongest in the region over the past decade. “We expect growth of 6.6 percent yoy in 2014 and 8 percent by 2015, underpinned by a demographic window of opportunity as well as cyclical re-leveraging and structural developments (introduction of unemployment benefits, increased Saudization and housing efforts).

Besides, the SR250 billion housing appropriations and mortgage laws are likely to progress slowly but steadily in the near term, the report further said.

The report also said that economic activity weathers labor market reforms.

The Saudi economy appears to have weathered reasonably well the impact of the labor market reforms introduced last November.

Real GDP expanded by 4.7 percent yoy in 1Q14, down from an upwardly revised 5.0 percent yoy in 4Q13.

Robust oil expansion boosted headline growth by 1.1ppt. Non-oil real GDP growth slowed down to 4.4 percent yoy, from 5.5 percent in 4Q13.

This was largely due to the non-oil private sector, which grew by 4.4 percent yoy, down from a pace of 6.0 percent in 2013. This was the slowest pace for over a decade.

Growth in the government non-oil sector expanded further to 4.1 percent yoy, but we do not expect a much stronger boost. Slowdown was most visible in the wholesale, retail trade and construction sectors, which grew by 3.8 percent yoy and 5.6 percent yoy in 1Q14, from 6.5 percent yoy and 9.9 percent yoy in 4Q13 respectively.

The negative near-term implications of labor market reforms are mitigated by the fact that the eventual replacement of lower-level expatriate labor by higher-paid Saudi labor should prove supportive for consumption trends once the dust settles.

The Saudi unemployment rate stood at 11.5 percent in 4Q13 (total unemployment rate: 5.5 percent), up from 10 percent in 2010 (total unemployment rate: 5.5 percent), though the increase is likely distorted by the introduction of job-seeker registration since then, in our view.

May 3mma point of sales data expanded by 13.6 percent yoy, decelerating from the c20 percent yoy average level in 2013, but still suggesting that consumer spending appears to have held up reasonably well against any expatriate worker outflows. Similarly, June PMI stood at solid sub-60 levels.

Negative impact of recent MOL clampdown is just a phase, the report said.

Moreover, the report noted the dominant role of the government in the Saudi economy makes it well placed to support consumers through a number of price subsidies, public sector employment drives, frequent wage increases, plans to curb inflation and access to a pool of subsidized financing at Specialized Credit Institutions (SCIs).

With increased pressure to provide job opportunities in a market with a high unemployment rate, the Ministry of Labor (MOL) has been compelled to take measures against illegal expats, of which 1.2-1.5 million had already left by the end of 2013.

While the MOL is gradually granting visas back, we see no clear regulatory action to get the residency issues completely resolved.

However, “we believe it is at least a normalization in 2H14 given that (1) we are hearing less about mass outflows of foreign labor, (2) MOL inspections are going ahead more smoothly than expected and (3) we have seen no violence in expat areas.

The report also noted that the Saudi digital electronics is “under stress.” The report remained cautious on the Saudi digital electronics space on the belief that (1) the Saudi market is already well penetrated in terms of consumer electronics per capita ($132 per capita compared to $65 for other EEMEA countries) and (2) expect less ground-breaking tech innovations over the next 12 months from the key global players which could propel digital electronics LFL sales growth figures again into a bull cycle, comparable to 2011-2013.

Regarding the MERS outbreak, the report said the virus is likely to have little impact on Saudi Arabia’s consumption for now. It “is unlikely to have major impact,” although the report urged to remain vigilant should the virus spread rapidly. Feedback from corporates about the impact on sales has been comforting so far,” it added.

This article was first published in Saudi Gazette on Wednesday, August 13, 2014.