With the oil boom, Saudi Arabia’s consumption growth in the past decade was among the most stellar in emerging markets. And the demographic window of opportunity makes a large, young and unlevered population an asset for the Saudi consumer to deliver over the medium term. While elevated oil prices support income growth, given a growth model tailored to factor accumulation, specificities of the story indicate further diversification efforts are needed to sustainably increase employment of nationals in the private sector and boost productivity growth, according to a report by Bank of America and Merrill Lynch.
A large and young population is Saudi Arabia's key asset compared to its GCC peers, as Saudi Arabia’s favorable demographics will support growth in the coming decade. Unlike aging economies where stagnant labor force growth implies a greater need for productivity growth to sustain GDP growth, Saudi Arabia is likely to exhibit strong working-age population growth of 2.2 percent until 2020, above an average of 0.7 percent for a broad-based basket of EM countries.
The oil boom, rapid economic and population growth, urbanization drive, low leverage and increased public sector employment has led Saudi real private consumption to register among the fastest growth in EM over the past decade, the report said.
From 2001-10, Saudi consumption growth grew at a 6.5 percent yoy average rate, on par with India, topping Turkey and South Africa, and only trailing Russia and Malaysia. Similarly, the private real consumption share of real GDP increased by 11ppt over 1999-2010 to stand at 52.9 percent of GDP. This improvement in consumption's share has not been uncommon for the rest of the GCC, though Saudi Arabia’s share appears to have grown steadily compared to a more volatile performance in the UAE, marked by a harsh contraction due to the aftermath of the 2009 recession.
The government's dominant position in the Saudi economy has put it in a strong position to support the consumer, through a number of price subsidies, public sector employment, frequent wage increases, inflation alleviation plans and access to a pool of subsidized financing at Specialized Credit Institutions (SCIs). In addition to strong private sector employment growth (an average of 7.1 percent yoy in 2005-2010), public sector employment growth was steady at an average 3.3 percent over 2000-2011. The average private sector wage (SR1,290/month) is only in line with the salary scale of public sector clerks.
High frequency data also suggest consumer spending remains robust. Point of sales transactions, a proxy for retail sales, grew by 18.7 percent in August, though the expansion pace is lower than the 37 percent yoy 2011 average due to the stimulus.
Saudi consumer leverage is among the lowest overall, with consumer credit accounting for just 15 percent of GDP at the end of 2011.
The Saudi consumer has grown strongly over the past decade, but the potential implied by the favorable demographics has not been fulfilled. The report said a range of structural weaknesses centering on the segmented labor market are still a drag on consumption growth and could cap growth over the medium to long term. The failure of the labor market to accommodate the confluence of a large youthful population and income disparities resulted in large public sectors and low labor participation rates, particularly among women.
However, structural long-term reforms are being implemented through training programs, education reforms and a social safety net. Still, a starting income per capita base much lower than its GCC peers allows room for catch-up and convergence potential, Bank of America and Merrill Lynch report said.
Kingdom’s consumption growth fastest in EM
