Growth Prospects Remain Robust, But Risks Rising

Preliminary data from Saudi Arabia's Central Department of Statistics (CDoS) shows that Saudi Arabia's economy grew by 3.8% in real annual terms in 2013, slightly above our forecast of 3.6%. The growth rate for 2012 was revised upward to 5.8%, from 5.1% previously. In addition, we have now incorporated recent CDoS revisions to historical national accounts data for the period since 2004, with the new series showing a substantial increase in recent GDP growth rates (the statistical authorities' revisions were prompted by improved coverage of the non-oil sector in the most recent census). Following the CDoS' new series, the average real growth rate for the 2005-11 period stands at 6.4%, from 3.9% in official previous estimates (see chart below). We forecast growth to reach 4.3% and 3.3% for 2014 and 2015 respectively.

In line with our expectations, Saudi Arabia's 2013 economic performance proved healthy, albeit relatively mild in comparison to the robust growth of previous years. Weighed down by production cuts in the first half of the year, the oil sector (which continues to account for around half of economic output) contracted by 0.6% in real terms, acting as a drag on the headline growth figure. Within the non-oil economy, growth in government services slowed to 3.7%, down from 5.5% in 2012 and its lowest rate since 2006. The construction and trade and retail sectors, on which we maintain our medium-term bullish outlook, fared better, growing by 8.1% and 6.2% respectively. We expect construction and retail activities to perform well throughout 2014, although both sectors remain exposed to the impact of changing labour market regulations and supply-side shortages linked to the recent crackdown on expatriate workers (see ''Saudisation' To Have Widespread Effects', April 17, 2013).

While we retain our 2014 real GDP growth forecast of 4.3% for now, we believe that the balance of risks is shifting to the downside. In the oil market, Saudi crude production has remained elevated over the last quarter of 2013, standing at 9.75mn bbl/d in November, up from 9.5mn in the same month of 2012. Due to continuing supply disruptions across OPEC and non-OPEC producers, Saudi output is likely to remain elevated over the early months of 2014. However, we expect growth in the Saudi oil sector to be modest for the year as a whole, given the constraints imposed by rising production from Iraq and non-OPEC members. Our Oil & Gas research team forecasts the OPEC basket price to average US$101.8/bbl in 2014, down from US$105.9/bbl in 2013, with developments in Libya, Kazakhstan and Nigeria representing key downside risks to prices. The potential for an earlier-than-expected breakthrough in the Iranian nuclear talks and subsequent return of significant volumes of Iranian crude to the markets will also remain a key point of uncertainty to global oil supply over 2014 (see 'Challenges To Nuclear Detail Remain', January 13).

CDoS' Revisions Give Significant Boost To Growth
Saudi Arabia - Real GDP Growth, %

Growth Prospects Remain Robust, But Risks Rising

Preliminary data from Saudi Arabia's Central Department of Statistics (CDoS) shows that Saudi Arabia's economy grew by 3.8% in real annual terms in 2013, slightly above our forecast of 3.6%. The growth rate for 2012 was revised upward to 5.8%, from 5.1% previously. In addition, we have now incorporated recent CDoS revisions to historical national accounts data for the period since 2004, with the new series showing a substantial increase in recent GDP growth rates (the statistical authorities' revisions were prompted by improved coverage of the non-oil sector in the most recent census). Following the CDoS' new series, the average real growth rate for the 2005-11 period stands at 6.4%, from 3.9% in official previous estimates (see chart below). We forecast growth to reach 4.3% and 3.3% for 2014 and 2015 respectively.

CDoS' Revisions Give Significant Boost To Growth
Saudi Arabia - Real GDP Growth, %

In line with our expectations, Saudi Arabia's 2013 economic performance proved healthy, albeit relatively mild in comparison to the robust growth of previous years. Weighed down by production cuts in the first half of the year, the oil sector (which continues to account for around half of economic output) contracted by 0.6% in real terms, acting as a drag on the headline growth figure. Within the non-oil economy, growth in government services slowed to 3.7%, down from 5.5% in 2012 and its lowest rate since 2006. The construction and trade and retail sectors, on which we maintain our medium-term bullish outlook, fared better, growing by 8.1% and 6.2% respectively. We expect construction and retail activities to perform well throughout 2014, although both sectors remain exposed to the impact of changing labour market regulations and supply-side shortages linked to the recent crackdown on expatriate workers (see ''Saudisation' To Have Widespread Effects', April 17, 2013).

Construction And Services Outperform
Saudi Arabia - Real Growth By Sector, % chg y-o-y

While we retain our 2014 real GDP growth forecast of 4.3% for now, we believe that the balance of risks is shifting to the downside. In the oil market, Saudi crude production has remained elevated over the last quarter of 2013, standing at 9.75mn bbl/d in November, up from 9.5mn in the same month of 2012. Due to continuing supply disruptions across OPEC and non-OPEC producers, Saudi output is likely to remain elevated over the early months of 2014. However, we expect growth in the Saudi oil sector to be modest for the year as a whole, given the constraints imposed by rising production from Iraq and non-OPEC members. Our Oil & Gas research team forecasts the OPEC basket price to average US$101.8/bbl in 2014, down from US$105.9/bbl in 2013, with developments in Libya, Kazakhstan and Nigeria representing key downside risks to prices. The potential for an earlier-than-expected breakthrough in the Iranian nuclear talks and subsequent return of significant volumes of Iranian crude to the markets will also remain a key point of uncertainty to global oil supply over 2014 (see 'Challenges To Nuclear Detail Remain', January 13).

Still Robust, But Signs Of Moderation
Saudi Arabia - Purchasing Managers' Index (left) and Private Sector Annual Credit Growth (right)

Macroeconomic fundamentals remain more robust in the non-oil economy, with the headline purchasing managers' index reading for December 2013 standing at 58.7, well above the 50 mark separating expansion from contraction in the non-oil private sector. That said, annual lending growth is beginning to ease, a trend we see continuing over the coming quarters (see chart above). While we expect fiscal policy to remain supportive of economic activity, we note that the economy will find it harder to respond to a fourth consecutive year of government stimulus; moreover, with global oil prices projected to decline, pressure is increasing on the authorities to begin restraining public spending. The recently announced budget for the 2014 fiscal year plans for a record level of expenditure, at SAR855bn (US$228.0bn) - yet this represents a modest 4.3% increase on the 2013 budget, compared to the 18.8% rise seen between planned 2012 and 2013 expenditures.

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