Saudi Arabia: Economy Ready for Low Oil Prices

On the 25th of March 2015, the Kingdom of Saudi Arabia led, along with nine other Arab States, the Operation “Decisive Storm” in Yemen. The Kingdom’s military intervention is intended to support the toppled President Abd Rabbu Mansour Hadi against the coalition of the Iranian-backed Houthis and the ex-President Ali Abdullah Saleh. After the “coup-d’état”, President Hadi has been forced out of Yemen by Houthi rebels and has taken refuge in Saudi Arabia.

Saudi Arabia: Economy Ready for Low Oil Prices

On the 25th of March 2015, the Kingdom of Saudi Arabia led, along with nine other Arab States, the Operation “Decisive Storm” in Yemen. The Kingdom’s military intervention is intended to support the toppled President Abd Rabbu Mansour Hadi against the coalition of the Iranian-backed Houthis and the ex-President Ali Abdullah Saleh. After the “coup-d’état”, President Hadi has been forced out of Yemen by Houthi rebels and has taken refuge in Saudi Arabia.

The SABB HSBC Saudi Arabia PMI averaged 58.8 points in the first quarter of 2015 (Q1 2015) higher than the average 58.4 points recorded in Q1 2014. The PMI readings have recorded strong results in terms of output growth and new business while low oil prices seemed to have lowered the burden of input costs.

Inflation remained contained on account of slower food inflation. Inflation continued its gradual decline in 2015, consistently falling from 2.2% in January to 2.1% in February and 2% in March.

Rental inflation, another major component of overall inflation, also slowed down from a 3.9% y-o-y growth in January to a y-o-y growth of 3.2% in March. However, rental inflation should remain monitored as long as the Kingdom suffers from a housing shortage.
The city of Jazan is a vivid example of the still unresolved housing shortage where experts believe rents have almost doubled from an annual 14,000 SAR ($3,733) to 26,000 SAR ($6,933). Located in the southwest corner of the Kingdom, Jazan is home to a large population and to major projects such as the Jazan Economic City and Saudi Aramco’s 400,000 barrels per day refinery.

On the external front, both non-oil exports and imports dropped in the first two months of 2015. According to the Central Department of Statistics, non-oil exports fell by 15% from $9.32B up to February 2014 to $7.96B up to February 2015. Imports also declined by 2% from $26.06B up to February 2014 to $25.64B up to February 2015.

Of the top three imported products, metal products recorded a 12% drop to $2.85B. Meanwhile, the top three exported items Rubber Products, Products of the Chemical and allied industries as well as transport equipment and parts all registered declines of 16% to $2.6B, 30% to $2.19B and 3% to $879M, respectively.

Saudi Arabia: Economy Ready for Low Oil Prices

As the Kingdom already stated in the last OPEC meeting, it has not assumed the role of “swing producer” in order to drive oil prices back up. In fact, according to OPEC, the Kingdom consistently increased its production in 2015, from 9.64 million barrels per day (mbpd) in January to 9.66 mbpd in February to 10.01 mbpd in March.

Low oil prices not only affected imports and exports but are also why the Kingdom might record in 2015 its first fiscal deficit in four years. The fiscal deficit is expected at $38.67B as revenues are expected to drop by 16.4% and expenditures are forecasted to grow by a marginal 0.6%. With ample foreign reserves held by the Central Bank (SAMA), standing at $714.29B in February 2015, the government can easily cover this deficit. Interestingly enough, foreign reserves recorded their first year on year decline in February since 2010, on account of a drop in foreign currency and deposits abroad. However, the option of borrowing on international markets is very much on the table as it will prevent tapping into the country’s own reserves and especially since the Kingdom is endowed with one of the lowest debt-to-GDP ratios in the world of around 2.6%. The expected dent in the budget did not however prevent the new King from granting government workers a two-month salary bonus in January.

Moreover, the Kingdom’s banking sector remains robust and liquid. The assets of commercial banks stood at $578.47B in February, an 11% y-o-y growth. Bank lending to the private sector totaled $340.75B in February, also an 11% yearly growth. Bank deposits also grew by a yearly 11% and amounted to $426.47B in February.

The Tadawul All Share Index (TASI) ended the first quarter at a level of 8,778.89 points, down by 7.33% from the same period last year. However, the index maintained a positive year-to-date performance of 5.35%. Market capitalization also decreased by a yearly 1.37% to reach $506.33B in Q1. The value of traded shares amounted to $152.32B while their number totaled 21.91 billion. The Capital Markets Authority has decided to cancel the listing of the Saudi Integrated Telecom Company, effective 12/03/2015. Four insurance companies were the top performers in Q1 2015: Wataniya, ACE, Allianz SF and ATC along with one real estate development company: Makkah. As for the bottom performers, they were Walaa Insurance, Eastern Agriculture, Nama Chemicals, AXA Cooperative and AICC.

Leave a Reply

Your email address will not be published. Required fields are marked *