JEDDAH — Saudi Arabia will face a moderate business cycle during 2015 and 2016, growing around 3% in real terms, the National Commercial Bank said in its “Saudi Economic Perspectives 2015-2016” report themed “Tackling Challenges on Solid Ground”. The report said the assumption centers on lesser contribution from the oil sector and moderation in the non-oil sector. “We project real GDP growth of 3.4% for 2015 due mainly to the non-oil sector maintaining last year's pace of around 5%. The series of royal decrees announced in January and April 2014 will provide favorable stimulus to the non-oil private sector, with the construction and retail sectors the key beneficiaries, especially from the bonus payment of two salaries to all public sector employees,” the report said. Last year, the economy grew for the fifth year in a row, with the Kingdom's annual growth rate of real GDP registering 3.6%. Nevertheless, economic growth in nominal terms at 1.09% was lower than 2013, on the back of marginally lower oil prices. By the end of 2014, the Arabian light average spot prices registered $97.2/bbl, an 8.6% decline compared to 2013. However, the insignificant real growth in the oil sector at 1.72% was offset by the non-oil private sector that grew by around 5.7%. The private sector had increased its contribution to real GDP to around 39.5%, which illustrates the growing role that private enterprises are assuming in the Saudi economy. The main drivers of private sector growth were construction, manufacturing, and trade that grew by 6.70%, 6.54%, and 5.97% respectively. There is little doubt that oil markets are currently oversupplied, with demand dynamics and supply factors suppressing oil prices, a scenario that is expected to persist in the remainder of 1H 2014. Yet, the unraveling shale model and OPEC's June meeting will be instrumental in shaping the landscape of oil markets during the second half of the year. “We do believe that the market will balance as US crude production inflects to the downside, breaking the anomaly of lower rigs and higher production, as the shale oil business model faces tough economic realities. Hence, we see Arabian light prices protected at a floor of $50/bbl and on average to settle at $65/bbl in 2015. According to our estimates, Saudi crude oil production is expected to rise by an average of only 100 thousand b/d, reaching 9.8 MMBD. “The demand for oil will continue to be hampered by global economic growth that continues to be revised downwards, with the IMF in January reducing its forecast for global growth in 2015 to 3.5%, down from an October prediction of 3.8%. Notably, this was the third revision downwards by the IMF since January 2014, underscoring the headwinds facing the global economy.” Besides, “the weak and uneven economic recovery of the eurozone will remain a hanging cloud on world markets, with the Greek debt crisis far from over and deflation lurking in the background. Despite the sharp decline in prices since June, demand has not edged higher, with the IEA predicting just tentative signs of recovery, with global oil demand growth expected to register 1 MMBD in 2015,” NCB said in the report. Moreover, monetary policy in Saudi Arabia is exhibiting a high degree of stability and predictability compared to most emerging markets that suffer from structural deficiencies, which entangled their monetary policy in a balancing act between supporting economic growth and defending currencies.
SAMA is mainly concerned these days with price stability and money supply dynamics. On a medium-term note, with the Fed expected to raise its target funds rate by the end of the year and gradually thereafter, SAMA will follow suit by increasing the repo and reverse repo rates for the first time since 2009, NCB said in the report. Further, the weaker prospects for most advanced economies and export-dependent emerging markets will act as headwinds that could potentially drive global growth projections lower. Downside risks emanating from Chinese economic slowdown, disinflation/deflation, geopolitical risks in Ukraine and the Middle East as well as Greece's debt debacle will remain key themes in 2015, the report noted. — SG
