Jadwa Investment’s Saudi economy in 2019 report has forecasted 2 percent growth in the economy during the year. Latest full year GDP data for 2018 shows that the economy was able to absorb most of the disruptive effects of necessary economic reform enacted last year. Looking ahead, as comparably limited major reform is scheduled to take place during 2019, this should clear the way for a pick-up in momentum for the Saudi economy. Overall, whilst the oil sector’s output will be partially trimmed by Saudi Arabia’s commitment to the OPEC and partners (OPEC+) agreement, the report forecasts a marginally higher year-on-year growth in the non-oil sector.
The non-oil sector will continue to benefit from an expansionary fiscal policy. Aside from a 20 percent rise in capital expenditure, a distinct set of targeted measures should help maintain some level of growth in domestic consumption. Specifically, payments under the Citizen’s Account will be continued, annual allowances for public sector workers will be reinstated and there will be a rolling over of inflation allowances, as per a Royal decree. In addition, a recently approved scheme will allocate SR11.5 billion to help eligible companies with expat fees. All these measures combined will contribute to raising non-oil growth to 2.3 percent, up from 2.1 percent in 2018.
Within the non-oil private sector, sizable contributions to growth from both the ‘Finance, insurance, and business services’, and ‘non-oil manufacturing’ sectors are expected. Aside from rises in credit to the private sector, growth in the ‘Finance, insurance, and business services’ will be aided through the inclusion of the Tadawul All Share Index (TASI) into both the MSCI EM and FTSE EM indices. Additionally, growth will be supported through efforts to attain targets outlined under the Financial Sector Development Program (FSDP). For non-oil manufacturing, Jadwa Investment expects the recently launched National Industrial Development and Logistic Program (NIDLP) as being the main driver of growth in non-oil manufacturing. More specifically, the NIDLP will see SR100 billion being spent in 2019, and 2020, in order to kick-start the program.
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The largest sector in the economy, the oil sector, which accounted for 44 percent of GDP in real terms at the end of 2018, is forecasted to grow by 1.6 percent, resulting in overall GDP growth of 2 percent in 2019. The report states that whilst Saudi crude oil production is expected to remain unchanged on a yearly basis in 2019, partly as a result of compliance to OPEC+ agreement, oil GDP will be boosted by a rise in gas output and the opening of the Jazan refinery. Meanwhile, Jadwa Investment expects non-oil private growth to rise to 2 percent during the year and non-oil government sector growth to equal 3 percent.
On a sectorial basis, wholesale and retail sector recorded growth of 0.8 percent in 2018, slightly better than the 0.6 percent registered in 2017. Looking ahead, the report states that as both the expat levy and dependency fees are raised in 2019, higher wage earners, and their dependents, are expected to continue leaving the Kingdom, which will not only hurt consumer staples, but will be more acutely felt in consumer discretionary spending as well. That said, the entertainment sector should provide some lift in growth through an ambitious program of events planned during the year, as outlined by General Entertainment Authority (GEA).
The transport and communication sector grew by 1.7 percent as a number of new projects came online during 2018. Looking ahead this sector should benefit from growth in overall number of mobile subscriptions, especially in mobile data usage, as the Communications and Information Technology Commission (CITC) commercially launches the fifth generation (5G) network by mid-2019. Growth in real estate activities saw 2.2 percent growth in 2018, lifted by the Ministry of Housing’s (MoH) ‘Sakani’ program and this program will be the main contributor to growth in 2019 as well.
The construction sector contracted by 3.1 percent in 2018, after declining 3.3 percent in 2017. Cement and steel production, a gauge of construction sector activity, were both down in 2018, by 10 percent and 6 percent year-on-year respectively. Looking ahead, the recent regional trip by the King, which included signing numerous construction projects, plus progress on the PIF’s giga-projects will bring about a mild rebound into positive territory for the sector in 2019.
On the fiscal side, Jadwa Investment expects Brent oil prices to average $66 pb, and Saudi crude oil production to average 10.3 mbpd in 2019, resulting in oil revenue equal to SR625 billion, or SR37 billion less than the government’s budgeted revenue of SR662 billion. On the non-oil revenue side, the investment firm expects to see a figure equal to the budgeted figure of SR313 billion. As a result, Jadwa Investment forecasts a slightly higher budget deficit of SR168 billion, equivalent to 5.5 percent of forecasted GDP in 2019 but does see the possibility of anticipated windfalls from privatization, or indeed proceeds from the corruption probe, being used to ensure government deficit targets are achieved.
The report states that economic growth will continue improving in 2020 on the back of record budgeted expenditure of SR1.14 trillion, up 3 percent year-on-year. Saudi crude oil production is expected to rise to 10.5 mbpd, which will push up oil sector GDP to 2.1 percent in 2020. Non-oil GDP is expected to maintain growth of around 2.3 percent as further rises in capital expenditure are budgeted. Nevertheless, the economy will also see expat levies rise to peak levels during the year and, as such, the private sector will face up to even higher operating costs.
According to the report, one major development in 2020 will be the continued implementation of energy price reform, as detailed in the original FBP document and reiterated in subsequent updates. According to the FBP schedule, natural gas/ethane and LPG prices will see a gradual transition to a yet-to-be determined reference price next year. Whilst there have been reports of a possible support program being established for the industrial sector, any sizable changes in the price of natural gas/ethane would nevertheless have implications for petrochemical companies. The report does suggest that the recent launch of NIDLP would ensure strong growth in the non-oil manufacturing sector as a whole next year.
Aside from non-oil manufacturing, construction and transport are forecasted to be the stand out sectors in 2020. On the construction side, the sector should continue benefitting from work on a number of PIF’s giga-projects (NEOM, Qiddiyah, Red Sea Project) but also from the developments related to the Saudi Entertainment Ventures Company. On the transport side, the much anticipated SR82 billion Riyadh metro is expected to become fully operational during 2020, whilst continued phased openings of the King Salman International Complex will also help lift the sector.
© Press Release 2019