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03-Jul-2018

Saudi Arabia Economics - 1Q18 GDP outturn: Nothing new under the sun as non-oil growth slows, likely due to fiscal measures

Non-oil growth weakens further on fiscal measures

Saudi Arabia’s real non-oil GDP growth continued to decelerate in 1Q18, down to 1.6% from 1.8% in 4Q17 and 2.3% in 3Q17, as the economy felt the pinch of fiscal measures implemented earlier in the year (led by fuel and electricity price hikes and the introduction of VAT). Indeed, the slowdown was driven by the private sector (1.1% vs. 1.9% in 4Q17) with increased public spending – mostly on social benefits and wages that also led to a widening of the fiscal deficit – balancing the slowdown (public sector growth accelerated to 2.7%, the highest in nearly three years). At a sector level, contraction in the trade and transportation sectors were a clear drag on non-oil growth – especially for transportation, which was the first on record – in addition to contraction in the construction sector for the ninth consecutive quarter (Fig. 3). The three-year high growth in manufacturing was the only positive surprise. Overall, GDP growth reverted back into the black (1.2% vs. contraction 1.4% in 4Q17) thanks to higher production in oil (mostly coming from a low base effect as Saudi remained committed during the quarter to OPEC production cuts).  
 
Gradual recovery scenario maintained, risks to the downside in 2018

We continue to expect GDP growth to show a gradual recovery over the new few quarters as the economy absorbs the fiscal shocks. The pace of this recovery will be largely dictated by the speed at which the government is able to rollover its ambitious investment spending, of which we have not seen credible signs, even up to mid-year. Indeed, indicators for the construction sector remain weak (cement deliveries contracted 19% Y-o-Y in Apr-May) while project awards are still not showing any major signs of pick-up (up only 6% Y-o-Y in 6M18). Meanwhile, credit growth has seen a minor uptick though it is entirely driven by retail with the corporate loan book still contracting. We thus maintain our forecasts of real non-oil GDP growth of 2.2%, seeing risks largely to the downside. 
 
Consumption – Still a bumpy road ahead

Consumption has been showing mixed signals over the past few months. While some indicators, including POS sales and ATM withdrawals, are pointing to a pick-up in consumption patterns as well as consumer confidence, most consumer companies continue to report weak sales. We note that the relative improvement in consumption is partially nominal given higher inflation, and what is equally important to recognise is that it is being largely aided by aggressive discounts/offers by companies/retailers; the inflation figures show consistent declines in the various items on the consumer basket since VAT was implemented, likely hinting that retailers have been capping price increases through offers in order to spur demand. Eight of the ex-housing consumer basket have seen price declines since January, even when including typically seasonal price pressure in Ramadan (Fig. 6). This is expected given that the large exodus of expatriate workers, which we see continuing this year, as well as pressured disposable incomes of nationals, that has led to the overall market being pressured. The ability of companies though to continue offering such generous discounts is seemingly coming to an end with Almarai raising prices of fresh milk (yesterday) for the first time in a decade. We think this move from the largest dairy company in the country signifies the cost-cutting exercise that corporate Saudi Arabia has been going through to absorb the rising input costs is coming to an end. We therefore see more companies following Almarai’s route of raising prices, further pressuring private consumption. 

Mohamed Abu Basha