Interpreting Middle East Economic News and Analyzing Market Trends

Saudi Arabian economy expected to grow 3% in 2013, larger issues loom on the horizon

Twenty-twelve was a good year for the Saudi economy.  The final number on the GDP is expected to come in at 6.8% for the year.  This year, the economy is expected to grow 3% according to a report in Arab News.  However, the country faces large hurdles in the coming years.

 

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Saudi Arabia’s economy continued its robust growth above the pre-crisis average level of 3 percent last year, with real GDP registering 6.8 percent annual growth, driven by the oil sector and nonoil sector, according to Saudi Economic Developments and Outlook report by the National Commercial Bank. However, the NCB projects real GDP to moderate to 3 percent in 2013.

The report said Kingdom’s per capita income rise to SR 93,317 ($24,885), the highest on record. The EU sanctions on Iran’s crude exports that commenced in July enabled the Kingdom as a swing producer to maintain its 30-year high daily production. Saudi oil output rose by 7.2 percent in 2012, averaging 9.92 million barrels per day, which propelled the oil sector GDP by 5.5 percent, the fastest pace since 2005.

The private sector had also maintained its significant contribution to real GDP at 48 percent, growing by 7.5 percent in constant prices, which illustrates the growing role that private enterprises are assuming in the Saudi economy. The main drivers of private sector growth had been the nonoil industrial and construction sectors that posted growth rates of 8.3 percent and 10.3 percent, respectively.

The bank projects real GDP growth of 3 percent for 2013 due mainly to the projected contraction in oil production, which will decline by nearly 400,000 bpd. However, this contraction in the oil sector will largely be offset by the nonoil 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.

Read the full article from Arab News.

Slowing GDP growth and declining oil production are only some of the issues Saudi Arabia faces.  The country is currently the world’s largest oil exporter, but it may soon become a net importer of oil according to a report last year from Citigroup:

Oil and its derivatives are used for about half of the kingdom’s electricity production, which at peak rates is growing at about 8 percent a year, the bank said today in a an e-mailed report. A quarter of the country’s fuel production is used domestically, more per capita than other industrialized nations, as the cost is subsidized, according to the note.

If Saudi Arabian oil consumption grows in line with peak power demand, the country could be a net oil importer by 2030,” Heidy Rehman, an analyst at the bank, wrote. The country already consumes all its natural-gas production and plans to develop nuclear power, which pose execution risk amid a lack of available experts, safety issues and cost overruns, Rehman said.

“Indeed we would expect consumption to continue to outstrip population growth as Saudi Arabia’s currently young population ages and consumer spending increases supported by rising GDP per capita,” Rehman wrote.

Saudi Arabian power providers pay $5 to $15 a barrel for its fuel from state-owned Saudi Arabian Oil Co., according to the report. Brent crude, the benchmark for more than half the world’s oil, traded at $116 a barrel today on the London-based ICE Futures Europe Exchange.

As a result of its subsidies we calculate ‘lost’ oil and gas revenues to Saudi Arabia in 2011 to be over $80 billion,” Rehman wrote. “At the domestic level, we believe the only real way to rationalize energy consumption would be to reduce subsidy levels.”

Read the full article from Bloomberg.

  

So not only is the Saudi economy expected to barely keep pace with the population growth (2.3% in 2011 according to The World Bank), unemployment will continue to pose a long-term structural problem to the economy.  The question now is how will Saudi Arabia handle declining oil export revenues as local consumption eats up  production?  There are several plans in the works including solar power and nuclear power, but how soon will these two come online and how much local power demand will they satisfy?

 

The problems go deeper.  The country needs to focus on slowing domestic energy demand, which to date, little has been done.  This is a sensitive issue since energy consumption is subsidized.  With high unemployment (and rising), taking away any subsidies will surely create social instability.  Since the Arab Spring, governments in the Middle East, including Saudi Arabia, have been increasing social programs and subsidies to appease local populations.  Taking away subsidies is inevitable but dangerous to the survival of these governments.    The Arab Spring may have began in 2011, but it is far from over.  Demographics are not in Saudi Arabia’s (or the Middle East’s) favor. 

We will develop a more detailed analysis of the demographic time-bomb in the Middle East and how it will affect economic growth and political stability/instability in the region for years to come.