PMI dataThe
latest HSBC/Markit purchasing managers' index (PMI) for the Saudi
nonoil private economy shows a softening in the pace of activity in
July. The overall PMI index fell to 60, from 62.8 in the previous month,
the lowest level since October of last year. The output index slipped
by nearly five points, recording the weakest reading for 17 months, and
below the average for the two-year series history. Similarly, new
business taken on by private firms rose again in July, but the rate of
increase moderated by around six points. The index for new export orders
increased, suggesting that the slowdown was mainly due to softer
domestic demand.The Samba report said yet it is important to keep
the slowdown in perspective: While the pace of new orders slipped, net
new orders continued to show a healthy increase, with 43 percent of
respondents reporting a pickup in orders over June, compared to 13
percent reporting a decline.The rate of employment growth also eased
back, with the index falling by a point. Around 9 percent of
respondents reported an increase in employment in July, compared with
almost 20 percent in May. Respondents said that some of the increase was
a result of government regulations - presumably a reference to the new
Nitaqat Saudization rules. These involve a mixture of penalties and
incentives designed to encourage local firms to employ more Saudis.
Nitaqat is not scheduled to be rolled out in full until November, but
firms are busy realigning their workforces now.Project activityOther
indicators also point to a cooling of activity in recent months. Data
from MEED show that a pickup in project spending in the first quarter of
2011 has not been sustained and the value of projects either planned or
underway was down 12 percent in the twelve months to Aug. 9. A number
of large projects have been put on hold in recent months, including the
$30 billion Tabuk Economic City and the $25 billion Ras Al-Zour Resource
City.Retail salesOn the consumption side, retail sales have
moderated as the impulse from the government's salary adjustments,
instituted in February and March, fades. Monthly growth in the volume of
points of sale transactions, which are a proxy for retail sales, fell
back to 1.2 percent in June following an 18 percent spike in March.
Similarly, private sector import spending declined slightly in June
following a 22 percent surge in March. Again, it should be emphasized
that private consumption indicators remain very strong in year-on-year
terms: Points of sale volumes and private imports were up 27 percent and
15 percent, respectively, compared to the previous June, the report
added.Large projectsHow is the nonoil economy likely to
perform in the second half of the year? On the project front, the Dow
Chemical/Saudi Aramco (Sadara) petrochemical joint venture in Jubail
should provide a steady stream of contract awards, both in the second
half of 2011 and into 2012. Other large infrastructure projects set to
develop over the next few months include the Qurrayah independent power
project; the Madinah airport expansion; training and medical facilities
for the security forces; and Jeddah's Kingdom Tower, recently awarded to
the Bin Ladin Group.Yet the relatively sharp decline in oil prices
witnessed in early August might contribute to a slowdown in other
project activity. This is not a fiscal issue: “We believe the
government's fiscal position is sound and that exceptionally strong
spending growth will be more than covered by oil revenue this year.
Rather, the slide in oil prices is important for what it says about the
state of the global economy. Consequently, some private projects
focusing on export markets might be scaled back or delayed,” the Samba
report said.Corporate investmentLower oil prices are also
likely to have some impact on broader domestic investment among private
firms. This is largely psychological: If firms think that lower oil
prices will oblige some retrenchment in government spending then they
might trim their own investment plans. Regional political concerns,
which have yet to become "normalized" in the minds of most investors,
will also continue to have some influence, albeit a diminishing one.Overall
therefore, the pace of private activity - both investment and
consumption - is set to slow somewhat in the second half of this year.
But this slowdown is off a high base, and overall nonoil growth this
year is still set to push 5.5 percent-extremely brisk in historical and
regional terms. Indeed, the overall rate of GDP growth is likely to be
higher than previously anticipated given stronger-than-predicted crude
oil output in the first half of 2011. In 2012, government spending is
likely to ease back somewhat, but private consumption growth should be
supported by the introduction of unemployment benefit (likely to be
rolled out towards the end of this year) and other more regular social
security payments. The external environment should also improve, albeit
modestly. This should help to keep overall nonoil GDP growth at around 5
percent.Stock market External factors have continued to
have a marked influence on the Saudi stock market, which fell to a
five-month low in early August. This was essentially in response to the
turmoil in global equities, which, by the end of the first week of
August, had shed 5 percent of their value in just three weeks. By
mid-August the TASI (Tadawul All-Share Index) was down around 8 percent
from the beginning of the year, though the MSCI EM had fallen by around
13 percent. Currently, Saudi Arabia's substantial advantages — huge
energy reserves, minimal public debt, low interest rates, an ongoing
massive fiscal stimulus, and rapid population growth-appear to have been
obscured by the travails of the global economy, the Samba report said.
