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Khatija Haque - Head of Research & Chief Economist
Published Date: 25 January 2022
PMI survey data pointed to a slowdown in the non-oil sectors of the Saudi economy in December 2021, although the average PMI reading for Q4 2021 was unchanged from Q3, when headline GDP growth was around 7%. We estimate total non-oil sector growth in 2021 was around 5% and we expect this to moderate slightly this year to 4%. However, stronger oil sector growth this year will drive headline GDP to 5.7% from an estimated 2.5% in 2021.
Expenditure data show that the recovery in GDP growth in the first nine months of 2021 was driven by strong growth in private consumption and gross fixed capital formation. This is supported by point of sales transaction data, which showed a sharp rebound in consumer spending in H1 2021, although this slowed somewhat through November, and robust private sector credit growth throughout last year.
In H2 2021, oil production increased in line with OPEC+ agreements and was the main engine for headline GDP growth in Q3 21. With crude oil output exceeding 10mn b/d by December according to Bloomberg estimates, we expect oil sector GDP supported GDP growth in Q4 as well. For the year as a whole, Saudi oil production declined -0.9% y/y in 2021, broadly in line with the -1.0% contraction in oil & gas GDP that we had pencilled in for last year. Overall, we estimate Saudi GDP grew 2.5% in 2021 after contracting more than 4% in 2020.
Source: Bloomberg, Emirates NBD Research
In 2022, we expect growth to accelerate sharply to 5.7%, largely on the back of faster oil & gas sector growth as the kingdom continues to increase crude oil production. We expect non-oil sector GDP growth to moderate to 4.0% in 2022. Consumer spending is expected to normalize following the strong rebound in 2021, and the government remains committed to disciplined fiscal policy – the budget for 2022 shows a 6% decline in total government expenditure this year.
With oil revenues expected to be much higher this year however, the Saudi budget is forecast to record a surplus for the first time since 2013. We estimate a budget surplus of 0.6% of GDP in 2022 from an estimated deficit of -1.6% in 2021. The government’s forecast is for a larger surplus of 2.5% of GDP. With no budget shortfall expected this year, the debt management office will only need to manage the refinancing of debt falling due this year, which the DMO has indicated stands at SAR 43bn (USD 11.5bn).
Source: Ministry of Finance, Haver Analytics, Emirates NBD Research
Money supply growth has slowed since the start of the year, reaching 6.3% y/y in November from 9.8% in July, and private sector credit growth remains robust at 15.2% y/y. Net foreign assets at the central bank stood at USD 447bn at the end of November, little changed from the end-2020 figure. While the 3m SAIBOR rate has increased in recent weeks, this reflects the rise in USD rates as the market has priced faster tightening by the Fed; the spread of the 3m SAIBOR rate over 3m USD LIBOR has remained steady around 70bp.
Headline inflation has declined sharply on base effects (last summer’s VAT and customs duty increases are now in the base), falling to 1.2% y/y in December 2021 from 6.2% y/y in June. Consumer inflation averaged 3.1% in 2021, down from 3.4% in 2020. The main source of consumer inflation in Saudi Arabia last year – as in many other countries - was higher transport costs, which reflected the sharp rise in global oil prices. We expect inflation to slow further to an average 2.0% this year.
Overall, the outlook for Saudi Arabia’s economy remains constructive this year, underpinned by continued reforms in the social and economic spheres, as well as stronger budget metrics. While the government has reduced the amount of investment spending via the budget in recent years, the Public Investment Fund has ambitious domestic investment targets that will support growth over the medium term, and the authorities are working to boost foreign and private sector investment in the kingdom as well. The expected recovery in international tourism over the next couple of years should provide a further support to economic growth, as Saudi Arabia seeks to move beyond religious tourism.
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