Real GDP to grow by 4.4% in 2013

Saudi Arabia’s real GDP is estimated to have expanded 6.8 percent in 2012, according to Global Investment House’s review of the Saudi economy.
Following the record oil production seen in 2012, the government has resorted to strong fiscal stimulus measures and greater investment in infrastructure projects. However, GDP growth is expected to lower to 4.4 percent in 2013, as oil production stabilizes and benefits of previous expansionary fiscal spending are realized. Real oil GDP expanded 10.4 percent owing to higher oil prices and record levels of production. The oil sector grew 5.5 percent in 2012, on the back of increased output following sanctions imposed on Iran in early 2012. However, the sector’s growth is expected to remain subdued over the next five years with minimal/no increase in production or capacity expansion, as higher output from Iraq, North America and Libya comes on stream.
Nonoil GDP growth expanded 7.2 percent in 2012, followed by its strongest performance (8.0 percent) in the last eight years in 2011, led by uniform growth in private and government sectors. The nonoil private sector continued its growth trajectory in 2012. It rose 7.5 percent, albeit lower than the 7.8 percent growth (its highest level in last eight years) in 2011, led by strong growth in manufacturing, construction, retail and transport sectors. Moreover, all sectors registered growth in 2012. The nonoil public sector’s growth continued to be robust in 2012; it rose 6.3 percent in 2012 after increasing 8.7 percent in 2011.
The nonoil sector is expected to primarily drive the Kingdom’s real GDP growth, as the government continues to take initiatives to diversify away from oil and address social and development needs. The nonoil private sector’s growth is estimated to stay above the real GDP forecast, with growth averaging above 5.5 percent.
Meanwhile, the nonoil public sector’s growth is expected to remain steady at 3.9 percent until 2017.
Manufacturing is expected to continue driving growth in the private sector, led by strong domestic consumption and nonoil exports, supported by continued capital investments in the sector. Gross (real) fixed capital formation expanded at a CAGR of 17.0 percent over the last 10 years until 2012, while strong point of sale transaction data indicate ongoing demand for manufactured goods. Sales through point of sale transactions increased at a CAGR of 25.4 percent during 2007-2012. Meanwhile, nonoil exports have doubled since 2007 to $ 49.5 billion in 2012.
Construction, which rose 10.3 percent, was among the fastest growing private sectors in 2012, led by record contract awards. As the largest projects market in the Middle East, Saudi Arabia recorded contracts worth $ 50 billion in 2012, according to MEED estimates. Furthermore, MEED forecasts contracts awarded to increase to $ 70 billion in 2013.
Ongoing government spending on transport and social services is expected to keep the services sector vibrant. Under the Ninth Development Plan, the government intends to invest $ 30.0 billion in the transport and communications sector, and $ 74.0 billion in social and health services.
Trade surplus expanded to 35 percent of GDP in 2012 from 29 percent in 2010, with oil exports increasing to 48 percent of GDP from 41 percent over the same period. Oil exports, as a percentage of total exports, surged to 88 percent in 2012 from 86 percent in 2010, with crude oil accounting for almost 90 percent of oil exports and refined products accounting for the rest.
Current account balance is expected to remain positive, primarily due to high trade surplus that will continue to offset deficits in services and current transfers. Investment income from abroad, although sustained throughout the global economic slowdown, is believed to deliver better returns as interest rates are anticipated to rise after 2015. Consequently, current account balance is estimated to plunge to 12.4 percent of GDP in 2017 from 26.5 percent in 2012.
Improvement in the overall business climate is expected to increase foreign direct (net) inflows into the Kingdom, while portfolio investments abroad are likely to decline gradually. Foreign direct investment is expected to increase at a CAGR of 3.1 percent to $ 16.1 billion in 2017, while portfolio investments abroad are likely to decelerate at a CAGR of 10.6 percent to $ 10.4 billion. Other investments abroad are estimated to rise at a CAGR of 15.0 percent to $ 17.3 billion in 2017.
Population growth in Saudi Arabia is estimated to decelerate significantly in the coming decades following rapid growth in the last decade (2000-2010). Population growth is estimated to slow down to a CAGR of 2.0 percent between 2010 and 2020 and a CAGR of 1.4 percent during 2020-2030 vis-a-vis a CAGR of 3.2 percent in the previous decade (2000-2010). Following a backlash against the inflow of immigrants, net migration is expected to slowdown, as Saudization reduces demand for foreign workers. Non-Saudi population, which grew to a third of total population in 2012, is estimated to plunge by as much as 10 percentage points to 23 percent of total population by 2024.
The high rate of unemployment among Saudi nationals has prompted a backlash against companies hiring foreign laborers. The government hopes to strengthen its Saudization initiative, which includes fines ($ 640 a year for each additional expat) for companies with work force comprising less than 50 percent Saudi nationals, as a way to combat the persistent unemployment issue. Saudi Arabia aims to create 3 million jobs for nationals by 2015 and 6 million jobs by 2030, partly through the Saudization initiative. Moreover, the government has stepped up unemployment benefits through the Hafiz program introduced in late 2011.Through the program, unemployed Saudis are given SR 2,000 ($ 533) a month for up to a year to assuage discontent regarding the issue.
In 2013, fiscal spending would be almost 19.0 percent higher than the 2012 budget, but 4 percent lower than the actual spending. Education, health care, and transport and infrastructure received higher budgetary allocations. The new budget’s objectives are in line with the Ninth Development Plan (2010-2014), which has allocated more than 50 percent of $ 390.0 billion for human resources development to transform productivity of the Kingdom’s labor force, address youth unemployment and reduce reliance on the expatriate population.
In addition, the government intends to strengthen health care infrastructure by increasing the number of beds to over 100,000 by 2014 and hospital staff, among other initiatives. The impact of all these measures is likely to raise breakeven oil price by 14.5 percent to $ 85.2 in 2013.
Inflationary pressures, as measured by the cost of living index, continued to ease in 2012, led by softening prices of food items, rent, health care, and other expenses and services. Average inflation (end-of-the-year prices) in Saudi Arabia slowed to 4.6 percent in 2012, down from 5.0 percent in 2011 and 5.3 percent in 2010. The decline was particularly pronounced in the other expenses category, which regressed to 3.7 percent in 2012 from 9.0 percent in 2011. The index rose in late 2011, reflecting fast-rising gold and jewelry prices (which make up bulk of the category). However, the rate of increase in the category slowed in 2012, as gold prices stabilized.