Feel-good factor suggests Saudi economy has turned corner
Just how real is Saudi Arabia’s economic recovery? At the Financial Sector Conference in Riyadh a few weeks back, there was lots of optimism in the air, some positive news on the government budget, and some anecdotal evidence that a corner has been turned.
The budget surplus in the first quarter this year was the first since 2014, and though it turned out that factored in a big dividend payment from Saudi Aramco, there was still a sense of achievement about it. Following on from Aramco’s record-breaking bond issue, it added to the growing self-confidence about the Kingdom’s financial position.
Retailers at the conference in Riyadh spoke of an uptick in footfall at the country’s malls, while credit card companies reported a measurable increase in consumer spending, not least in the e-commerce sector.
The optimism was reinforced later when the International Monetary Fund opened the possibility of an upward movement in its forecast for economic growth for the year. If growth does hit more than 2 percent in 2019, as the IMF suggested might be possible, it would be another welcome step in the right direction.
Two recently published pieces of economic research add some substance to the general feel-good atmosphere, but also add some important caveats: The recovery has traction and substance, but is still vulnerable to a variety of factors, some within policymakers’ control, others entirely outside.
The most eye-catching piece of work came from those smart people at Bloomberg, who have produced a visual “heat map” of the Kingdom’s economic activity going back to the start of 2015, when the impact of the oil price collapse of the previous summer was yet to fully kick in.
For the time being, things are headed in the right way in the Kingdom’s economy. It still remains to be seen how fast or how far the recovery can go.
This work of art labels various sector within the Kingdom on a sliding scale from dark red — “slower growth” — to bright green, indicating “faster growth.” The most striking aspect is the depth of the slowdown between the first quarter of 2016, when the indicators began to turn red, through to the second quarter 2017, when the red finally gave way to some light green.
Most of the indicators are currently a pastel shade of green. One — point-of-sale transactions — is quite a dark shade, bearing out the evidence from the retail and credit-card executives.
Most, like stock market return, value of checks cleared, ATM cash withdrawals, and money supply, are a neutral shade of green, indicating that economic activity has just slipped into the positive. Only one — cement consumption — displays a subtle tinge of pink.
Added together on the Bloomberg map, these indicators show a gradual but appreciable uptick in activity in the non-oil sector, becoming more consistent as 2018 wore on. Bloomberg expects non-oil activity to grow by 2.6 percent on average this year, boosted by fiscal stimulus, a lower “drag” from monetary policy, and improved private consumption.
The other piece of research was less visually striking than Bloomberg’s, but nonetheless carried some important messages. Jean-Michel Saliba, Bank of America Merrill Lynch’s regional economist and one of the best analysts on Saudi Arabia, made the important point that policymakers in the Kingdom still have lots of leeway in terms of fiscal stimulus.
Government spending in the first quarter of 2019 was “unsustainably low,” Saliba argued. Despite “elevated” levels of salary for government employees and social benefits, capital and current spending were both down in the quarter. This means that economic policymakers have plenty of ammunition to use in the rest of the year, to further stimulate growth.
There are factors which could cloud this rosy picture: Nobody is quite sure where the oil price is going for the rest of 2019, and there is a large number of variables at play in global energy markets. On top of that, nobody can foretell the economic effect of heightened security concerns in the Arabian Gulf as a result of ratcheting up of sanctions against Iran.
But for the time being, things are headed in the right way in the Kingdom’s economy. It still remains to be seen how fast or how far the recovery can go.
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai