Aug 25 2011
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Saudi economy likely to outperform emerging markets in 2011
The latest HSBC/Markit purchasing managers' index (PMI) for the Saudi nonoil private economy shows a softening in the pace of activity in July. The overall PMI index fell to 60, from 62.8 in the previous month, the lowest level since October of last year. The output index slipped by nearly five points, recording the weakest reading for 17 months, and below the average for the two-year series history. Similarly, new business taken on by private firms rose again in July, but the rate of increase moderated by around six points. The index for new export orders increased, suggesting that the slowdown was mainly due to softer domestic demand.
The Samba report said yet it is important to keep the slowdown in perspective: While the pace of new orders slipped, net new orders continued to show a healthy increase, with 43 percent of respondents reporting a pickup in orders over June, compared to 13 percent reporting a decline.
The rate of employment growth also eased back, with the index falling by a point. Around 9 percent of respondents reported an increase in employment in July, compared with almost 20 percent in May.
Respondents said that some of the increase was a result of government regulations - presumably a reference to the new Nitaqat Saudization rules. These involve a mixture of penalties and incentives designed to encourage local firms to employ more Saudis. Nitaqat is not scheduled to be rolled out in full until November, but firms are busy realigning their workforces now.
Other indicators also point to a cooling of activity in recent months. Data from MEED show that a pickup in project spending in the first quarter of 2011 has not been sustained and the value of projects either planned or underway was down 12 percent in the twelve months to Aug. 9. A number of large projects have been put on hold in recent months, including the $30 billion Tabuk Economic City and the $25 billion Ras Al-Zour Resource City.
On the consumption side, retail sales have moderated as the impulse from the government's salary adjustments, instituted in February and March, fades. Monthly growth in the volume of points of sale transactions, which are a proxy for retail sales, fell back to 1.2 percent in June following an 18 percent spike in March. Similarly, private sector import spending declined slightly in June following a 22 percent surge in March. Again, it should be emphasized that private consumption indicators remain very strong in year-on-year terms: Points of sale volumes and private imports were up 27 percent and 15 percent, respectively, compared to the previous June, the report added.
How is the nonoil economy likely to perform in the second half of the year? On the project front, the Dow Chemical/Saudi Aramco (Sadara) petrochemical joint venture in Jubail should provide a steady stream of contract awards, both in the second half of 2011 and into 2012. Other large infrastructure projects set to develop over the next few months include the Qurrayah independent power project; the Madinah airport expansion; training and medical facilities for the security forces; and Jeddah's Kingdom Tower, recently awarded to the Bin Ladin Group.
Yet the relatively sharp decline in oil prices witnessed in early August might contribute to a slowdown in other project activity. This is not a fiscal issue: "We believe the government's fiscal position is sound and that exceptionally strong spending growth will be more than covered by oil revenue this year.
Rather, the slide in oil prices is important for what it says about the state of the global economy.
Consequently, some private projects focusing on export markets might be scaled back or delayed," the Samba report said.
Lower oil prices are also likely to have some impact on broader domestic investment among private firms. This is largely psychological: If firms think that lower oil prices will oblige some retrenchment in government spending then they might trim their own investment plans. Regional political concerns, which have yet to become "normalized" in the minds of most investors, will also continue to have some influence, albeit a diminishing one.
Overall therefore, the pace of private activity - both investment and consumption - is set to slow somewhat in the second half of this year. But this slowdown is off a high base, and overall nonoil growth this year is still set to push 5.5 percent-extremely brisk in historical and regional terms. Indeed, the overall rate of GDP growth is likely to be higher than previously anticipated given stronger-than-predicted crude oil output in the first half of 2011. In 2012, government spending is likely to ease back somewhat, but private consumption growth should be supported by the introduction of unemployment benefit (likely to be rolled out towards the end of this year) and other more regular social security payments. The external environment should also improve, albeit modestly. This should help to keep overall nonoil GDP growth at around 5 percent.
External factors have continued to have a marked influence on the Saudi stock market, which fell to a five-month low in early August. This was essentially in response to the turmoil in global equities, which, by the end of the first week of August, had shed 5 percent of their value in just three weeks. By mid-August the TASI (Tadawul All-Share Index) was down around 8 percent from the beginning of the year, though the MSCI EM had fallen by around 13 percent. Currently, Saudi Arabia's substantial advantages -- huge energy reserves, minimal public debt, low interest rates, an ongoing massive fiscal stimulus, and rapid population growth-appear to have been obscured by the travails of the global economy, the Samba report said.
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