Saudi Arabia’s non-oil sector rebounds in May

Saudi's non-oil economy showed signs of recovery in May, even as new orders from abroad continued to deteriorate. (Reuters)
Updated 05 June 2018
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Saudi Arabia’s non-oil sector rebounds in May

  • Saudi PMI score increased to 53.2 in May from all-time low of 51.4 in April.
  • UAE score improves but Egypt suffers decline.

Growth in Saudi Arabia’s non-oil private sector showed signs of recovery in May as businesses ramped up output to meet rising demand, a survey found.

The Emirates NBD/IHS Markit Purchasing Managers Index (PMI) — a measure of business conditions — increased to 53.2 from an all-time low of 51.4 in April.
A reading above 50 marks expansion in growth, while a measure under 50 indicates a contraction.
But the measure is still low compared to historical standards, with growth continuing to lag behind rates that were recorded last year, said Khatija Haque, head of MENA research at Emirates NBD.
“The survey data suggests that government spending and higher oil prices year-to-date are not boosting economic activity as much as they have in the past, although firms remained highly optimistic about their future prospects,” she said.
While rising oil prices — which surpassed $80 a barrel last month — have helped to bolster Saudi Arabia’s economy, the growth of the non-oil sector slowed this year due partly to the new value-added tax (VAT) and government-led price rises introduced at the start of the year.
These additional charges have helped to fuel inflation and reduce households’ spending power.
A Capital Economics research note published on Tuesday suggested the uptick in the PMI measure, among other economic measures, could indicate that the worst is over for the non-oil sector. 
“More timely figures suggest that the non-oil sector may have passed its recent trough. Growth in point of sales transactions, a proxy for consumer spending, picked up in the past couple of months,” the note said.
“Households have started to loosen the purse strings after a raft of public-sector bonuses were announced in January. And with the government planning to ramp up infrastructure spending this year, the rebound in the non-oil sector probably has some legs,” it said.
Year-on-year GDP growth is estimated to have reached 1.5 percent for the first quarter of the year, according to Capital Economics analysts.
In neighboring UAE, the non-oil private sector growth accelerated to a four-month high last month, with the local PMI reading rising to 56.5 from 55.1 in April.
The increase is said to reflect an
increase in new orders, output and employment growth. A measure of the country’s export business reached a 30-month high due to strengthening demand from the Gulf countries.
“The strong PMI reading in May was partly due to a rebound in export orders — reflecting improved external demand conditions — as well as significant price discounting domestically. As a result, while the headline index shows strength in activity, profit margins remain under pressure,” said Haque.
The forthcoming Expo 2020 event in Dubai has also bolstered confidence, with the government and private sector expected to ramp up spending as the event draws closer.
“The 2018 budget shows a planned 19.5 percent increase in spending compared to the previous year, and dedicates 21 percent of funds to infrastructure spending,” a Capital Economics research note said.
In contrast to the revival seen in Saudi Arabia and the UAE, business conditions in Egypt worsened during May.
The North African country’s PMI indicator slipped from 50.1 in April to 49.2, indicating a contraction in growth.
The deteriorating conditions have been blamed on a decline in new orders and weakening demand.
But Daniel Richards, MENA economist at Emirates NBD, remained optimistic about Egypt’s fortunes.
“The (PMI) index continues to hover around the 50 mark, a vast improvement on the trends observed prior to the November 2016 reforms, and while the forward-looking data is not quite as positive as it has been in recent months, it continues to point towards an ongoing improvement in the Egyptian economy,” he said.


Oil prices gain on lower US crude inventories, Libyan output disruption

Updated 42 min 50 sec ago
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Oil prices gain on lower US crude inventories, Libyan output disruption

SINGAPORE: Oil prices recovered some day-earlier losses in Asia on Wednesday, supported by a drop in US commercial crude inventories and the loss of storage capacity in oil producer Libya.
US crude inventories fell by 3 million barrels to 430.6 million barrels in the week to June 15, according to American Petroleum Institute (API) in a weekly report on Tuesday.
Brent crude futures rose 18 cents, or 0.2 percent, to $75.26 per barrel at 0351 GMT, compared with their last close on Tuesday.
US West Texas Intermediate (WTI) crude futures gained 20 cents, or 0.3 percent, to $65.27.
Traders said a drop in Libyan supplies due to the collapse of an estimated 400,000-barrel storage tank also helped push up prices.
Looming larger over markets, however, is a June 22 meeting in Vienna of the Organization of the Petroleum Exporting Countries (OPEC) with some other producers, including Russia, to discuss supply.
De-facto OPEC leader and top crude exporter Saudi Arabia, as well as Russia, which is not a member of the cartel but is the world’s biggest oil producer, are pushing to loosen supply controls introduced in 2017 to prop up prices.
Other OPEC-members, including Iran, are against such a move, fearing a sharp slump in prices.
“Saudi Arabia and Russia continued to push for a relaxation in production constraints, going against many other members’ wishes,” ANZ bank said on Wednesday.
“Iran rejected a potential compromise, saying it won’t support even a small increase in oil production. This puts Saudi Arabia in a tough position, as unanimity is needed for any accord to be reached,” it added.
Jack Allardyce, oil-and-gas research analyst at Cantor Fitzgerald Europe, said he had the “expectation that supply quotas will be increased, but probably more in line with the smaller range being quoted (300,000-600,000 barrels per day) given the lack of consensus among OPEC members.”
Allardyce said “we could see this knocking $5 per barrel off Brent and perhaps squeezing the WTI discount a little.”
Markets are also anxiously watching trade tensions between the United States and China, in which both sides have threatened to impose stiff duties on each other’s exports, including US crude oil.
A 25 percent tariff on US crude oil imports, as threatened by China in retaliation for duties Washington has announced but not yet implemented against Chinese products, would make American crude uncompetitive in China versus other supplies.
This would almost certainly lead to a sharp drop-off in Chinese purchases of US crude, which have boomed in the last two years to a business now worth around $1 billion per month.