Saudi economy grows 1.15% in the first quarter on rising oil prices

The growth report comes as Crown Prince Mohammed bin Salman pushes a package of sweeping economic and social reforms in the kingdom. Above, the spectators in Jeddah prior to the 2018 FISE World Series tour last March. (AFP)
Updated 01 July 2018

Saudi economy grows 1.15% in the first quarter on rising oil prices

  • Oil sector grows by 0.6 percent in the first quarter of 2018
  • Non-oil sector - the focus of economic reforms - grows by 1.6 percent

DUBAI: The Saudi Arabian economy bounced back into growth mode in the first quarter of this year, according to National Accounts figures from the General Authority for Statistics.

Gross domestic product (GDP) saw a 1.2 percent rise in the three months to the end of March, compared with the same period last year. This improvement follows four consecutive quarters of falling GDP, or recession, the Authority said.

“This indicates a recovery in the Saudi economy following the slowdown in 2017. Moreover, it is evidence of the resilience of the Saudi economy and its ability to recover from both the reduction in oil prices and the structural reforms,” it added.

The recovery came as a result of the accelerated growth both in the oil and non-oil sectors. The oil sector grew by 0.6 percent in the first quarter of 2018, as global oil prices continued to recover from the declines that began four years ago. The comparable figure in 2017 was a decline of 4.3 percent in oil GDP.

The non-oil sector, which has been the focus of policymaker’s initiatives at stimulus and expansionary budgeting, grew by 1.6 percent in the first quarter of 2018 compared to 1.3 percent in 2017.

“The main drivers behind the recovery was growth in the non-oil manufacturing and mining sectors by 4.6 percent and 6.3 percent, respectively. Moreover, pursuant to Vision 2030, these sectors are expected to lead the Kingdom’s future economic growth,” the Authority said.

Government services and financial services sectors also played a role in the non-oil sector growth. The government services sector grew by 3.4 percent, compared to 3.2 percent last year, while the financial services sector grew by 2.1 percent compared to 0.8 percent.

“The growth in both sectors is expected to continue rising due to listing the Saudi stock market in the MSCI as well as implementation of financial sector program initiatives,” the Authority added.

The Tadawul All Share Index ended the day 0.31 percent ahead at 8339.86 points, near its high for the year. Brent crude, the other crucial indicator for the Kingdom, is just short of $80 a barrel.

Activity in the construction sector continued to decline, but at a slower pace than last year — 2.4 percent compared to 3.5 percent, reflecting the completion of several major projects.

The retail and hospitality sectors contracted by 0.5 percent in the first quarter, compared to a growth by 1.4 percent in the final quarter in 2017. “This is expected behavior which came as a result of more rationalized spending for households due to implementation of value added tax,” the Authority said.

Monica Malik, chef economist at Abu Dhabi Commercial Bank, told Reuters: “To some degree we’re likely to return to Saudi Arabia’s old model of growth this year, with rising oil exports feeding through into the rest of the economy. Structural reforms to create other sources of growth may have an impact in coming years, but don’t look like they will be in time to have an effect this year.”

Iran looms large over OPEC summit

Updated 22 September 2018

Iran looms large over OPEC summit

  • Saudi Arabia only country in Mideast, and perhaps world, with enough capacity to keep market supplied, say experts
  • At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies

LONDON: The Opec summit in Algiers on Sunday meets amid widespread fears of a supply crunch when a forecast 1.4 million barrels a day of crude is lost from Iran in November when US sanctions kick in.
If, on top of that, more supply shocks hit the market in worse-than-expected disruption from Libya and Iraq, the price of crude could surge, said Andy Critchlow, head of energy news at S&P Global Platts. “At the moment, the market looks finely balanced,” he said.
There isn’t a lot of slack in the system. As Critchlow points out: “Upstream investment in infrastructure and new wells is historically low and it will take a long time to turn that around.”
At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies. The gathering comes after a tweet by President Trump on Sept. 20 calling on Opec to lower prices. He said on Twitter that “they would not be safe for very long without us, and yet they continue to push for a higher and higher oil price.”
Critchlow reckoned KSA still had spare capacity of about 2 million bpd. And KSA would get oil back as they go into winter as it had needed 800,000m bpd merely to generate electricity for the home market to meet heightened demand for air conditioning in the summer.
But there is uncertainty about what will come out of Algiers. For a start, the Iranians say they will not attend. That could be tricky in terms of an Opec communique at the end of the meeting as statements need unanimous support from member nations. And Iran has indicated it will veto any move that would affect Iran’s position, ie, one where other countries absorb its market share as sanctions bite.
Jason Gammel, energy analyst at London broker Jefferies, said: “The magnitude of the drop in Iranian exports is likely to be higher than any hit in demand as a result of problems linked to emerging market currencies, or trade wars. That’s why we expect oil prices to continue to strengthen. The Saudis and their partners will keep the market well supplied, and I think the issue is that the level of spare capacity in the system will be extremely low. Any threat or interruption will mean price spikes. Possibly by the end of the year demand will exceed supply; for now, the market remains in balance, but threats of supply disruption will bring volatility.”
Under the spotlight in Algiers is a production cuts accord forged by Opec and 11 other countries in 2016 which has been extended to the end of this year. The agreement helped reboot prices and obliterate inventory stockpiles that led to the crash in crude prices nearly three years ago. But how long will the agreement last? Algiers may kick that one into the long grass.
Thomson Reuters analysts Ehsan Ul-Haq and Tom Kenison told Arab News: “OPEC members would like to maintain cohesion within the group around supply ahead of Iran sanctions and declining Venezuela production, However, they are expected be in favor of maintaining stability in prices while doing so. On the other hand, they need to find a consensus around how their market share would be affected by a decision to pump more oil in the market. Any decision around production will likely be offset until the November meeting.”
Critchlow said that it is what KSA and Russia say and do that matters. “They speak for a fifth of the global oil market, producing a combined total of 22m bpd.” Together, they are the swing producers when it comes to crude production and supply.
Another factor about Algiers is that it is a meeting of the Joint Ministerial Monitoring Committee, which is not a policy-making forum. Big policy statements may have to wait for the main Opec summit in Vienna at the end of year. That said, there will be some very high-level delegations in Algiers, including the Saudi oil minister and his Russian counterpart.
A statement about the demand picture could emerge, especially as there are fears about the impact on the global economy from the US-China tariff war.
Looking to the future, Critchlow thought the Opec production cuts accord would carry on into 2019. “Oil priced between $70/bbl and $80/bbl is a sweet spot for Middle East producers. Its’s good for Saudi as it helps stop further drainage of their foreign reserves and moves the budget back toward balance. Do they want (the price) to go higher? I think that would cause a lot of political problems for them.”