Spearheaded by the government’s investment and diversification plan, Saudi Arabia’s non-oil economy will maintain its positive growth trajectory and post increases of 5 per cent in 2015 and 2016, a report said.

Government capital spending has been a linchpin of the Saudi economy in recent years with investment in a broad range of strategically important sectors, from transportation and housing to power and financial services, added the latest Economic Update released by the National Bank of Kuwait (NBK).

Infrastructure investments worth $1.1 trillion are envisaged on a range of high profile projects including the Riyadh and Makkah metros, $23 billion and $7 billion, respectively, the King Abdul-Aziz International Airport expansion, costing $4 billion, the $3.3 billion Shuqaiq power plant and the $3.5 billion Kudai Towers mixed-use development in Makkah.

Moreover, the government is in the process of unveiling its development plan for 2015-19, in which it will further elaborate on a diversification strategy centred on the development of five industrial clusters: automotives, home appliances, plastics and packing, mineral and metal processing, and solar energy, the report noted.

Having recorded growth of 5.5 per cent year-on-year (y/y) on average over the last five years, Saudi Arabia’s economic expansion is set to continue but at a more moderate pace during 2015-16.

Accommodative fiscal and monetary conditions are likely to persist, facilitating growth through low interest rates, double-digit increases in bank credit and greater disbursements by specialized credit institutions (SCI). Inflation remains subdued in the context of soft international food and energy prices.

Further progress is also anticipated with regard to the country’s housing shortage and relatively low private sector participation rate for nationals after the government introduced new housing regulations and labour market reforms. The prospect of lower oil receipts, however, is likely to result in the kingdom recording a fiscal deficit in 2015-16.

Real GDP growth to moderate in 2015

Real GDP growth is projected to slow from an estimated 4.2 per cent in 2014 to 3.6 per cent in 2015 before rising to 4.2 per cent in 2016. In view of the prevailing softness in international oil prices, a function of excessive supply, the Saudi authorities may be forced to cut oil output in 2015 either unilaterally or, more likely, in concert with several Opec countries, in order to stem the decline in prices.

Vibrant consumer activity

Benefiting from government spending, the consumer sector looks healthy and vibrant. Key activity metrics such as point-of-sale transactions (POS), the Purchasing Managers’ Index (PMI) and private sector credit growth point to a relatively buoyant non-oil sector during the first nine months of 2014. The overall pace of growth may be slowing, however. POS transactions were up by 10 per cent y/y in October and down from the 26 per cent y/y recorded in the previous month.

Vibrant real estate a particular focus

As part of its plans to diversify the kingdom’s productive base, the government has been engaged in a number of initiatives directed at the real estate and small and medium enterprise (SME) sectors. In the former, the government is keen to increase both the supply and affordability of housing for nationals; homeownership levels of around 36 per cent are relatively low by international standards.

As well as launching a new housing construction program of 500,000 new units in 2011, the authorities unveiled a new mortgage law in 2012 and stepped up their efforts to encourage real estate lending through the banking sector and SCIs such as the REDF. Real estate loans disbursed by banks stood at $36 billion by the end of 2Q14, an increase of 26.5 per cent y/y, with the retail segment receiving 63 per cent of all real estate loans.

Inflation set for moderate rise after easing in 2014

Inflation looks to have eased to an estimated 2.7 per cent in 2014 from 3.5 per cent in 2013. Rises in the price of food, housing, utilities and household equipment are the main determinants of inflation in the kingdom given their combined weight of 51 per cent in the cost of living index.

Current account surplus to narrow

Similarly, Saudi Arabia’s current account surplus is also projected to narrow, from an expected 15.0 per cent of GDP in 2014 to 5.7 per cent and 4.8 per cent of GDP in 2015 and 2016, respectively. While oil export revenues decline, imports will continue on their upward trajectory, thanks to burgeoning government spending.

Moreover, as the government rolls out its development plan and demand for expatriate labour to work on construction projects remains robust, remittance outflows are likely to increase. Consequently, the pace of foreign reserves accumulation should slow. However, with $774 billion in net foreign assets, or 102 per cent of estimated GDP in 2014, the kingdom has the equivalent of at least 34 months of import cover, a very comfortable cushion. – TradeArabia News Service