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Saudi Arabia: Non-oil growth set to slow this year

Khatija Haque - Head of Research & Chief Economist
Published Date: 04 July 2022


Saudi Arabia’s economy grew 2.6% q/q (seasonally adjusted) and 9.9% y/y in Q1 2022, faster than the growth rate in Q4 2021. However, most this was due to higher crude oil production (3.5% q/q and 20.7% y/y) according to the sector breakdown of GDP. Bloomberg’s oil production data for Q2 show that Saudi crude output continued to rise last quarter, and was up 22% y/y, which will support strong headline growth in Q2 as well.  While the annual growth rate in the hydrocarbons sector will slow in the second half of the year (oil production started to rebound from July 2021), we expect the expansion in oil and gas GDP will be the main driver behind our projected 7.7% GDP growth this year.  

KSA: Q1 GDP jumps on high oil production

Source: Haver Analytics, Emirates NBD Research

Non-oil sector growth was up just 0.2% q/q on a seasonally adjusted basis, and 4.2% y/y in the first quarter of 2022.  Non-refining manufacturing (4.1% y/y) was a key driver of non-oil sector growth in the first quarter on an annual basis, along with trade, restaurants & hotels (6.3% y/y) and transport, storage & communication (5.9% y/y). However, it is important to recognize that these strong annual growth rates are off a low Q1 2021 base as many Covid-19 restrictions were still in place in the first quarter of last year.  

The PMI data for Q2 suggests that the non-oil sector growth will likely be a similar rate to Q1.  Higher interest rates may curb domestic demand - already point of sales data (including ATM cash withdrawals) show a slowing in consumer spending in the first five months of the year to 3.1% y/y, compared with 7.0% growth in 2021. However, we expect public sector investment in mega-projects and strategic sectors to help offset any softness in private sector activity from tighter financial conditions. Overall, we expect non-oil growth to be sustained around 4% in 2022.

Inflation in the kingdom has been relatively low by global standards so far this year, reaching 2.2% y/y in May, but food inflation has been running much higher at 4.2% y/y in the latest reading. Transport, education and hospitality inflation have also been running faster than the headline rate. This has been offset by lower prices for clothing & footwear, and low housing and utilities inflation.  

Money supply and credit growth are also showing signs of slowing in the May data. Broad money supply growth has slowed to 7.8% y/y in May from 8.7% in April, while private sector credit growth has slowed to 13.9% y/y from 14.2% in April, the weakest credit growth since July 2020.  Nevertheless, the pace of credit growth continues to exceed deposit growth and this has likely contributed to the relatively wide Saudi interbank rate spreads over US dollar rates. 3m SAIBOR spreads peaked at 150bp over 3m USD LIBOR on 31 May, before SAMA reportedly placed SAR 50bn in deposits at commercial banks in June to boost liquidity in the market. The 3m SAIBOR spread has narrowed to around 65bp over 3m LIBOR as of 4 July. 

KSA: 3m SAIBOR spreads narrow after SAMA deposits

Source: Bloomberg, Emirates NBD Research

The stock of net foreign assets at the central bank was broadly unchanged m/m in May at USD 435.5bn and has declined by around USD 2.6bn since the end of last year, despite the sizeable fiscal surplus generated year-to-date.  This suggests that excess oil revenues may be being reinvested abroad, likely through the Public Investment Fund.  The government’s accounts (including government institutions deposits) at the central bank have risen by around SAR 70bn year-to-date, but this has been largely offset by a decline in SAMA bills and repos outstanding and other miscellaneous liabilities, indicating that the central bank has been making this liquidity available to the domestic financial system even before the June deposits.