JEDDAH – The Saudi real GDP will moderate to 3 percent in 2013, the national Commercial Bank said in its “Saudi Economic Perspectives 2013-2014 report released Wednesday. Last year, the Saudi economy continued its robust growth above the pre-crisis average level of 3 percent, with real GDP registering 6.8 percent annual growth, driven by the oil sector and non-oil sector. Accordingly, this had boosted the Kingdom's per capita income to SR93,317, the highest on record, the report said. “We project real GDP growth of 3 percent for 2013 due mainly to the projected contraction in oil production, which will decline by nearly 400,000 b/d. However, this contraction in the oil sector will largely be offset by the non-oil sector, which is expected to grow by 7.6 percent, the second highest on record, driven by the private sector, mainly manufacturing and construction as well as the public sector that is projected to register around 6 percent this year.” The oil sector will support economic growth in nominal terms if prices surpass those of last year and more than compensate for the contraction in oil production, however, the reduced production will weigh negatively on real GDP. The report noted that the tightly balanced global oil markets still remains the baseline scenario for the near-term, which will ensure that oil prices remain elevated. The forecast of $105/bbl for the average Arabian light spot prices will help keep total revenues above the SR1 trillion mark, registering SR1.08 trillion, the fourth highest on record, despite projecting that Saudi oil production will average 9.5 mmbd in 2013, marginally lower by 4.2 percent than 2012's output due to higher compliance among OPEC members. Accordingly, oil revenues are expected to decline by 14.7 percent to around SR973 billion, which also takes into account a 6.4 percent decline in export volume. Moreover, the report forecast that real oil GDP will contract by around 3.1 percent in 2013, the first negative figure since 2009 when the Kingdom reduced its production by 1 mmbd, from 9.22 to 8.17 mmbd. The projections will, of course, be contingent on the direction of the US-Iranian conflict, the resilience of global demand conditions and stability in the international financial environment, NCB said in the report. However, growth in the non-oil sector will remain above the 7 percent threshold in 2013. Real non-oil GDP in 2012 grew by around 7.2 percent, which is higher than the 10-year average of 4.7 percent, largely driven by the stellar performance of the non-oil private sector. The private sector contributed a significant 48 percent to real GDP, growing by 7.5 percent, illustrating the vibrant role that private enterprises are assuming in the Saudi economy. The main drivers of private sector growth were the construction, manufacturing, and the retail sectors, which posted 10.3 percent, 8.3 percent and 8.3 percent annual growth, respectively. This vibrancy of the private sector emanated from the royal decrees, the enhanced business confidence and the improved financing environment. Evidently, the growth in manufacturing and construction benefited from the pickup in credit, receiving SR14.5 billion and SR5.6 billion, respectively, in incremental loans and advances from banks in 2012, which represents an annual increase of 13 percent and 8 percent. The boost to business confidence underpinned the value of awarded construction contracts that remained above the SR200 billion threshold. One of the promising growth drivers for corporate Saudi is non-oil exports that reached a historical $48.9 billion last year and that, in our view, will gain momentum, along with domestic demand, given the vertical and horizontal diversification plans that will enhance the absorptive capacity of the economy. The business cycle will likely remain in place on the back of this year's government budget allocation for capital expenditure that will total SR285 billion as well as the continued spillover effects from the permanent fiscal measures that were triggered by the royal decrees. The unemployment assistance program known as “Hafiz” that started in December 2011 have supported private consumption, with around 2 million Saudis having received SR30 billion by the end of January 2013. Additionally, the increase by more than SR10 billion in the government's wage bill as a result of providing regular civil service jobs for temporary public sector workers will continue to act as a catalyst via the multiplier effect. NCB reiterated that the high marginal propensity to consume of Hafiz recipients implies that most of the money that will be received will be consumed. “We expect non-oil sector growth to remain elevated, averaging 7.6 percent in 2013, with the non-oil private sector crossing the 8 percent threshold to a record 8.6 percent, as most sectors reap the benefits of the myriad of projects coming on-stream. Construction and manufacturing will remain the key beneficiaries in 2013, growing at 10.5 percent and 8.5 percent, respectively,” the report said. Furthermore, inflation registered an annual 4.5 percent increase last year and will likely remain stable for 2013, with upside risks from imported inflation and rising domestic credit. The slowly recovering global economy pressured commodity prices lower as reflected by the Thomson Reuters/Jefferies CRB Index that declined by 3.4 percent during 2012. Besides, according to the UN Food and Agriculture Organization (FAO), food prices decreased over the fourth quarter of 2012 to offset price hikes witnessed mid-year. The Food Price Index fell 7 percent annually while dairy prices were the only category to register a rise of 0.9 percent. More specifically, local food prices increased at an average of 4.4 percent last year in comparison to 2011's 5.2 percent. However, the trade-weighted dollar dropped 0.5 percent during 2012 and is expected to be pressured lower in 2013. Given the nature of the dollar peg, imported inflation might pose a challenge for the Saudi economy. “We do believe that the foodstuff category will hover around 5 percent for the first half of 2013…. (and) the monetary policy will not be responsive for food driven inflation unless upside risks erode the purchasing power of low income classes, an unlikely scenario,” the report added. On the supply side, oil output is expected to increase in 2013, according to the International Energy Agency (IEA) owing to growth from OPEC and non-OPEC producers. The production capacity of OPEC will expand by an estimated 0.7 mmbd on additional supply from Iraq, Angola, and Nigeria. Production in Iraq is surging, as the country rebuilds its oil industry with output reaching its highest level since 1979. Supply from countries outside OPEC is expected to rise by 0.8 mmbd, to reach a total of 54 mmbd in 2013. In the US, the Energy Information Administration (EIA) predicts production from the Bakken shale formation in North Dakota, Eagle Ford formation in South Texas, and Permian Basin in West Texas to record a bigger increase in 2013. Additionally, in its December report, OPEC estimated that the demand for its crude will average 29.07 mmbd in the first half of 2013, which can lead to a buildup in inventories by more than 1 mmbd should OPEC maintain its December production level. The EIA, IEA and OPEC do see that world oil supply will easily outstrip demand in the first half of 2013, thus, acting as a drag on prices in the near term. However, NCB believes that the buildup in inventory and the OECD forward demand cover standing at such a comfortable level will enhance compliance by OPEC countries that reduced their production to 30.53 mmbd in January 2013, a 13-month low. Saudi Arabia has also been unilaterally decreasing its supply in recent months, curbing output to a 15-month low of 9.1 mmbd. Meanwhile, the demand side had been supported by central banks that have played a critical role in September, with the ECB and the FED announcing unlimited programs to purchase distressed sovereign debt in the former and mortgage-backed securities in the latter. Accordingly, the EIA, IEA and OPEC have projected increases in the range of 0.8-1.0 mmbd for global oil demand in 2013. Recently, the IEA had raised its forecast for global oil demand by an additional 0.24 mmbd to 90.8 mmbd for 2013, citing expectation of higher demand from China. Ostensibly, oil markets seem to be more optimistic about the Chinese economy as confidence indicators recently turned expansionary after a long period of pessimism and as the once in a decade leadership transition was finalized. – SG
