Saudi GDP growth ticks along nicely on oil and higher capex

Saudi Arabia’s General Authority for Statistics released initial estimates of real GDP scores for the first quarter 2023, which show the economy grew at a pace of 3.9 per cent. While this marks a slowdown in pace to the 5.5 per cent growth the previous quarter, economic activity is projected to grow further over the rest of the year.

The non-oil revenues increased 9 per cent in Q1 2023 while oil revenues declined by 3 per cent. This is in line with the Saudi Vision 2030 under which the country aims to diversify non-oil exports and increase its share of non-oil GDP from 16 per cent to 50 per cent.

The surprise decision by OPEC+ to slash oil production will exert near-term pressure on the Kingdom’s oil GDP growth. Nevertheless, any subsequent spike in oil prices arising from lower supply is expected to bolster the non-oil sector.

That being said, Saudi’s oil revenues remain healthy. For instance, nearly all of Japan’s crude imports in March stemmed from the Middle east, with Saudi Arabia accounting for nearly 42 per cent of Japan’s total imports amounting to 32.77 million barrels.

A budget surplus

According to the Ministry of Finance, Saudi Arabia reported a budget deficit of SR2.91 billion in Q1-23. Actual revenue increased 1 per cent to SR280.94 billion of which oil revenue amounted to SR178.61 billion.

Expenditure shot up 29 per cent year-over-year to SR283.9 billion. In its first quarter budget, the government had allocated SR52.1 billion for education, SR58.9 billion for defense, and SR49.6 billion on health and social development. Nevertheless, Saudi Arabia lowered its public debt by 2.89 per cent to SR962.25 billion during the first quarter as cash inflows remain resilient.

Moving forward, analysts are anticipating a budget surplus for the first time in eight years.

Higher capital spends

The government allocated 9.2 per cent of its total expenditure to capital spends, amounting to SR25.98 billion in Q1-2023. This marks a significant increase from SR14.8 billion incurred in Q1-2022.

Overall, the government has budgeted SR157 billion towards capital expenditure in 2023 – higher than the SR151 billion in 2022. This is the highest in four years and will be directed towards the completion of various projects under Vision 2030 and achieving economic diversification.

Heightened corporate lending

Given the robust pipeline of projects being constructed in the middle of the desert from scratch, corporate lending is expected to remain elevated. This is driving overall credit growth in the sector.

The Saudi Central Bank (SAMA) hiked interest rates by 25 basis points to 5.5 per cent following the Fed’s decision to tighten financial conditions further in May. The next phase of Fed’s tightening will likely involve holding interest rates at higher levels for longer – a move that will likely be replicated by the SAMA.

This will further enhance net interest margins (NIM) for Saudi banks. Moreover, lower loan impairment charges and strong capital positions will pave the way for profitability in 2023.

Saudi Arabia is also focused on creating lenders with a broader scope – which will in turn encourage M&A activity amongst banks.

Favorable demographics by way of more foreign workers and greater participation of women in the workforce will support growth. A higher allowance for capital expenditure will help scale up the private sector’s contribution to economic growth to 65 per cent as compared to present levels of slightly above 40 per cent.

This is also largely dependent on the country’s ability to attract foreign investments. By virtue of these factors, the overall economic outlook for Saudi Arabia appears positive.