Amidst a still turbulent Middle Eastern scene, the United Nations blacklisted four Saudi and Kuwaiti nationals for financing Islamists in Syria and Iraq. As a response the two countries announced they would abide by the UN resolution aimed at halting any financial support to extremist groups. Moreover, the Kingdom donated $100M to the UN Counter-Terrorism Center. The Kingdom’s aid during the third quarter of 2014 also targeted the Palestinian people with $140.7M, the Iraqi people with a humanitarian assistance of $500M and the Lebanese Army with a $1B donation.
The Kingdom’s real GDP growth slowed from 4.70% in the first quarter of 2014 (Q1 2014) to 3.78% in the second quarter of 2014 (Q2 2014). Both the oil and non-oil sectors grew at a gentler pace going from 5.8% and 4.35% in Q1 2014 to 2.51% and 4.17% in Q2 2014. The private sector was the only sector witnessing acceleration in its growth from 4.43% in the first three months of the year to 4.72% in the following three months of the year.
Recent Purchasing Managers Index (PMI) readings reiterate the robustness of the private sector. The SABB HSBC Saudi Arabia Purchasing Managers Index (PMI) increased from 60.7 in August to 61.8 in September, its fourth successive upturn and the highest reading since June 2011. Strong demand especially for construction boosted new work and output while employers increased their staffing levels at the highest levels in around two years.
In spite of the ongoing shortage of affordable housing, inflation remained contained during Q2 2014. The Consumer Price Index (CPI) recorded year-on-year increases of 2.6% in June and 2.8% in July, August and September. Inflation remains at bay from last year’s highs such as the 3.7% recorded in July 2013.
According to Jones Lang La Salle’s real estate report, the shortage of housing led to an increase in sales and rental prices for the residential and retail sectors in Q3 2014.
In the residential sector, the rent index for apartments rose by 6% y-o-y while the sales index grew by 11%. For villas, it’s the rental index that increased the most, rising by 12% y-o-y while the sales index edged up by 4%. Despite the 13,000 units which were completed in the first six months of the year, the total supply of 957,000 units falls short from meeting the Saudis’ demand. The Jones Lang La Salle report forecasts a supply of 6,000 units in the last quarter of 2014.
In the retail market, average retail rents per square meter have increased across the board on a quarter-to-quarter basis. Retail rents have ranged between $722.67/sqm and $754.67/sqm according to the report. In 2014, the two important completed projects were Al Nakheel Mall and the Olaya Towers Retail space while the retail segments of the King Abdullah Financial District KAFC and ITCC, the first IT park of the kingdom, were delayed and pushed into 2015.
Aside from the housing shortage, yet another challenge presents itself, but this time in one of the economy’s main pillars: Oil. The rising US oil production has flooded the market, pushing oil prices downwards to around four years low. With low production costs, Saudi Arabia is able to bear with lower prices and preserve its market share. It remains to be seen whether it will agree to once again assume its role of “swing producer” by curbing output to shore up prices.
Although lower oil prices mean lower export revenues, the Kingdom’s external position is nonetheless robust. Made up of 74% investments in foreign securities and 24% of foreign currency and deposits abroad, SAMA’s reserve assets recorded an ample $744.91B in Q3 2014. However, the accumulation of foreign reserves has slowed over 2014 posting respective year-on-year growths of 9% in Q1, 7% in Q2 and 6% in Q3.
The Tadawul Stock Exchange Index (TASI) recorded a 14.1% y-o-y growth in Q3 2014 and reached 10,854.8 points. The volume of traded shares reached 15.6B, the value of traded shares amounted to $142.03B and the total market cap totaled $590.13B. The value of investment funds stood at $32.4B in Q3 2014, a 17.6% y-o-y increase. The Saudi Arabian cabinet has licensed the Public Investment Fund to start companies in the Kingdom and abroad, on its own or with the partnership of the private and public sectors. The Capital Markets authority has also announced in July that it will allow direct foreign investment on Tadawul in early 2015. For now foreigners can only invest on Tadawul through swap arrangements: after the direct investment news broke, the number of swap arrangements increased from 173 in H1 2013 to 182 in H1 2014.