JEDDAH — Saudi Arabia will face a moderate business cycle during 2014 and 2015, growing around 4 percent in real terms due to lesser contribution from the oil sector and moderation in the non-oil sector, the National Commercial Bank said in its latest report on the Saudi economy, reiterating its perception in earlier report titled “Growth Moderation on the Horizon” issued in June. NCB said in its new report that weighted average Arab light prices will fall from $106.4/bbl in 2013 to an estimated $102/bbl in 2014, “a wild call at the time especially that oil peaked in the summer as the benchmark Brent broke the $110/bbl threshold. The second half of this year was to exhibit weakness in oil markets on the back of sluggish demand and resurging supply, with a firm believe that geopolitics had been factored in. The latest figures released by the Central Department of Statistics and Information (CDSI) pertaining to the second quarter lend support to the abovementioned assumptions, the repot added. The real GDP registered a 3.8 percent annual growth rate, which was the second lowest figure since data going back to 1Q2011 and it is expected to decline further if OPEC decided in its November meeting to cut production to prop up crude prices that fell precipitously in early October. Although the contribution of oil remained positive, it was a mere 2.5 percent Y/Y that is much lower than the previous quarter's 6.1 percent. Meanwhile, non-oil GDP remained within the 4 percent range for the fourth quarter in a row, posting 4.2 percent, the slowest in more than 3-years. The deceleration in non-oil vibrancy is attributed to both the private and public sectors that respectively grew by 4.7 percent and 2.6 percent, near three year lows. Analyzing the breakdown of non-oil private GDP by sector reveals that private services composed of commerce, transport & communication, finance and insurance and that weigh around 48 percent was the biggest drag last quarter, growing by just 4.1 percent. Meanwhile, surprisingly enough, manufacturing and utilities seem to have limited the overall deceleration, expanding by 6.5 percent and 8 percent. In the case of manufacturing, this was near the highest record since 1Q2012 while for utilities it was the largest expansion since 3Q2012. The nominal GDP under the expenditure approach reflects a slowdown in consumption that represents 53.6 percent of total spending in the Kingdom. After two quarters of double-digit growth, total consumption grew annually by 7.9 percent, with private and public consumption growing by 7 percent and 9.2 percent, respectively. The single-digit growth in public consumption was significantly lower compared to the previous two quarters that grew on average by 20 percent Y/Y. On the contrary, investment spending was robust, rising by 17.4 percent, the highest since 3Q2012. All of the abovementioned data illustrates that projections about a 4 percent growth rate for this year is materializing, and given the current dynamics a similar performance next year is the most likely scenario, with oil prices suppressed and crude production gains contained. Meanwhile, the Saudi financial system continues to be in the expansive phase with markets flooded with liquidity keeping interest rates suppressed. Money supply in the Kingdom is still recording a solid annualized growth which in August was at 14.5 percent, above this year's average of 13 percent. The currently low inflation level at 2.8 percent gives SAMA the ability to support the economy with high liquidity, keeping borrowing costs low. Moreover, increased government spending on mega-projects created a noticeable wealth effect which led to a spike in disposable income as indicated by the 28.3 percent annualized surge in points of sale transactions. Delving deeper into money supply, NCB said monetary base expanded by 11.3 percent Y/Y, reaching SR342.5 billion. Deposits with SAMA, the largest component of the monetary base, returned to moderate after a 35 percent spike in July, growing by 12.8 percent in August to SR161.1 billion whereas currency outside banks continued accelerate by 9.9 percent to SR155.6 billion after a short respite the previous month at an all-year-low of 1.7 percent. Demand deposits maintained a double-digit Y/Y growth rate of 13.4 percent to SR945.4 billion, which, albeit below the year's average of 14.5 percent, remains at healthy levels. Hence, M1 (narrow money) amounts to a total of SR1.1 trillion. Time and savings deposits posted the highest growth rate of any money supply component at 23.8 percent for the second consecutive month. This is largely due to a near 50 percent surge in government entities deposits in time and savings accounts, bringing the total of time and savings deposits to SR390.3 billion. Broad money (M2), therefore amounts to SR1.5 trillion, leaving around SR188.5 billion allocated in quasi-monetary deposits. We expect that interest rates will move in tandem with the Fed's decision next year in order to maintain the dollar peg, and avert currency speculation. Consumer prices averaged marginally higher in August as the benchmark inflation rate recorded a 2.8 percent annual rise compared to this year's average of 2.7 percent. Upward inflationary pressures were mostly due to a 3.1 percent upturn in housing and utility, followed by a 4.4 percent rise in furnishings and household equipment prices. Food prices moderated greatly since the beginning of the year down to 2.5 percent from 6 percent in January. Recreation and culture-related items recorded a 10.9 percent annualized price increase which may be due to the soaring demand in summer festivities. Miscellaneous goods and services, which make up 6.8 percent of the general index notably recorded a 4.3 percent surge in prices, owing to the strong demand in the overall economy. Demographics in the Kingdom ensure the continued inflationary trend whereby the youth majority seek to own assets, particularly housing. However, government efforts continue to race on the supply side in order to ensure price stability and retain the purchasing power in the economy. We do not foresee inflation crossing the 3 percent level this year and will likely remain under control on par levels in the first half next year. — SG
