Saudi crude story overshadows its non-oil sector. That’s not a bad thing

Saudi crude story overshadows its non-oil sector. That’s not a bad thing

General view of Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia. (REUTERS)
General view of Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia. (REUTERS)
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After the painful dislocations of the COVID-19 pandemic, which was preceded by a period of low oil prices and fiscal consolidation, the Gulf economies appear to be firing on all cylinders.

Saudi Arabia’s annual real growth rate reached an estimated 9.9 percent in the first quarter. Compared to the last quarter of 2021, the seasonally adjusted real gross domestic product advanced by a robust 2.6 percent.

These numbers reflect a broader regional trend. The World Bank recently projected GDP growth of 5.9 percent for the Gulf Cooperation Council region this year, followed by 3.7 percent in 2024. These figures reflect an encouraging improvement after a trying period and promise a paradigm shift from the historically low trend growth and recurrent volatility during the decade that preceded the pandemic.

Much of the growth increment is coming from increased oil production as the OPEC+ group continues its return to pre-pandemic levels.

The Saudi oil sector’s year-on-year growth reached a remarkable 20.3 percent in the first quarter and was 2.9 percent higher than the preceding quarter.

In addition, the OPEC+ group recently agreed to bring forward its targeted monthly production increases in July and August from 432,000 barrels per day to 648,000 bpd.

The Gulf OPEC members will likely be delivering on these plans given their significant spare capacity, even as many other alliance members have struggled to meet their targets for months.

These realities mean that the oil sector will be a powerful growth engine in the Gulf during in the near future.

The World Bank foresees 12 percent real growth for the GCC hydrocarbons sector this year, projected to moderate to 4.1 percent in 2023. Besides the post-pandemic normalization of oil markets and containment of disruptions caused by the Eastern Europe crisis, the Gulf producers are working to boost their future production.

The Kingdom has indicated that it is on track to its capacity by more than 1 million barrels per day to 13.4 mbpd by early 2027. ADNOC is planning to ramp up its oil production capacity to 5 mbpd.

While these plans entail potential complications for economic diversification, they reflect the increasingly strategic standing of the Gulf in the evolving global energy markets.

The region is now one of the leading repositories of spare capacity globally. Moreover, its established extraction and transportation infrastructure entails a flexibility in modifying output levels in response to evolving market conditions and pivoting between different export markets. As a result, investments in the gas sector can serve the domestic economies and contribute to export potential.

Moreover, the link between increased oil extraction and diversification has evolved because of increased downstream investment and the expanding manufacturing sector.

The performance of the Saudi non-oil sector in the first quarter of (which year) was far less spectacular than that of oil but very respectable by recent historical standards.

A 0.9 percent gain in the last three months of 2020 reflected an improving outlook, delivering a 3.7 percent year-on-year increase. Encouragingly, the private sector guided the forward momentum as government activities rose by a smaller 2.4 percent year-on-year and declined from the previous quarter.

The region’s non-oil sector has seen a solid first half of 2022. Most indicators point to a strong, broad-based expansionary momentum even though the inflationary pressures could be like a fly in the ointment.

Regionwide, the World Bank projects non-oil growth of 2.7 percent this year and 3.2 percent in the medium term. After a strong rebound in 2021, the regional non-oil economy is still benefiting from the post-COVID normalization of activity, supported by high vaccination coverage at home and increasing global mobility, even allowing for some continued supply chain disruptions.

The travel and tourism sector has seen a quick rebound, and even the construction and real estate cluster, which until recently grappled with significant demand-supply imbalances, is showing signs of returning to growth. Positive price dynamics are becoming evident in several regional markets.

But as encouraging as the near- to medium-term outlook is, a couple of things stand out. Firstly, much of the momentum is coming from oil. However, even with the planned capacity increases, this will be a temporary impetus. Secondly, the implications of the outlook for diversification are mixed at best.

While the non-oil outlook is good and seemingly resilient, a gap remains between these figures and the strategic aspiration of putting a productive private sector at the forefront of driving growth.

All of this points to one inescapable conclusion, which, thankfully, Gulf policy-making increasingly reflects. The fortuitous moment in time is, above all, an opportunity to save the sovereign windfall for future investment, something that the regional semi-sovereign funds are doing with growing conviction and impact.

Despite the waning fiscal pressures, governments should remain disciplined — as they appear determined to be — and continue with their strategic fiscal remodeling.

The oil-fueled wave of liquidity washing through the finance banking sector should be seized as an opportunity to channel capital into new areas that can contribute to longer-term productive capacity and innovation.

It implies discipline on personal credit and managing exposures to real estate and construction. The real opportunity of the current windfall is to transfer it into initiatives that can push up the trend non-oil growth rate in the years and decades ahead.

Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.


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