Monday, Jul 04, 2016

Dubai: The latest economic data from Saudi Arabia points to sharp deceleration in economic growth as decline in oil prices and the fiscal consolidation efforts by the government is taking toll on the real GDP growth of the country.

The impact of Saudi Arabia’s deep fiscal consolidation was visible in its first quarter 2016 economic performance. Real GDP growth decelerated to 1.5 per cent year on year in the first quarter of 2016, down from 1.8 per cent in the fourth quarter of 2015 and 3.3 per cent in 1Q2015.

Data from the Kingdom’s General Statistical Authority showed that the real non-oil activity contracted in the first quarter of 2016 by -0.7 per cent year on year to -1.67 per cent from 0.5 per cent in the fourth quarter of 2015. This reflects fiscal reform measures announced in December 2015 and January 2016, including revisions to utility and fuel prices. In addition the government had announced a contractionary budget for 2016.

“The stronger contraction in the fourth quarter of 2015 was likely due to the government’s expenditure freeze, so that it could prioritise its spending objectives. Private sector growth decelerated sharply to 0.2 per cent year on year in the first quarter, down from 3.5 per cent in the previous quarter. We highlight that both corporates and individuals would have been impacted by the fiscal consolidation,” said Monica Malek, Chief Economist of Abu Dhabi Commercial Bank.

Analysts say Saudi Arabia could face negative GDP growth for the full year 2016 as the support for the non-oil sector from the oil sector fades this year on account of low prices combined with slowing production. The main support to real growth was from the oil sector, which expanded by 5.1 per cent year on year in the first quarter of 2016. The real data only takes into account the changes to oil production, whilst excluding price movement. The strong production in the first quarter of 2016 reflects the government’s continued policy of securing market share. However, analysts expect that the support from the oil sector to growth is likely to moderate in the remaining quarters of 2016. Data showed Saudi Arabia’s monthly oil production has been lower on a year on year basis since April 2016.

Data points to the impact of a fiscal drag on both investment and consumption activity across the non-oil sectors, while construction activity declined from 5 per cent in the first quarter of 2014 to -2 per cent in the first quarter of 2015, wholesale, retail and hotel business posted a contraction of more than 1 per cent and utility sector about 0.5 per cent during the same period.

Additionally, the extra spending in the first quarter of 2015 including on public sector bonuses, which was followed by a number of private sector companies following the royal succession boosted non-oil activity; the impact of this higher base will moderate from the second quarter of this year.

Clearly, lower oil prices and deceleration in production translating into lower real GDP growth for the year. “We lower our real GDP growth forecast for 2016 to -0.1 per cent, from 0.5 per cent earlier, following the release of the first quarter data. We now see real non-oil GDP contracting by -0.2 per cent, from +0.9 per cent previously. Private sector activity will continue to be impacted by fiscal retrenchment and tightening in monetary conditions with the squeeze in banking sector liquidity,” said Malek.

The latest economic data points a potential decline in real GDP below the projections of the International Monetary Fund (IMF). The IMF which concluded its Article IV Consultation in Many had projected a real GDP growth of 1.2 per cent, down from 3.5 per cent in 2015.

By Babu Das Augustine Banking Editor

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