Emerging

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21  
EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
Saudi Arabia  
Non-oil GDP growth prospects remain sluggish  
Thanks to increased oil production and higher public spending, Saudi Arabia’s economic growth should be able to be positive again  
in 2018. Yet the private sector is showing only timid signs of recovery, despite fiscal stimulus measures, and we are not expecting a  
significant turnaround in activity in the short term. Job market reforms and their negative impact on domestic demand have sharply  
curtailed economic activity. The total number of employed workers has declined while the unemployment rate remains high,  
especially among youth. Saudi Arabia’s low attractiveness for foreign investors does not facilitate the essential reform process.  
Oil is fuelling economic growth again  
1- Forecasts  
In 2018, the Saudi economy is expected to swing back into growth  
after contracting 0.8% in 2017. Second-quarter sector data confirm  
a mild acceleration in activity. Real GDP growth rose to 1.6% yoy in  
Q2 2018 from 1.2% in Q1. Unsurprisingly, the main growth engines  
were oil production and public spending.  
2
016  
2017 2018e 2019e  
Real GDP growth (%)  
1.7  
-0.8  
2.0  
2.0  
Inflation (CPI, year average, %)  
Central. Gov. balance / GDP (%)  
Central. Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
2.0  
-17  
-0.9  
-6.5  
2.7  
2.0  
-3.7  
-2.0  
13.0  
-3.7  
17.0  
2.4  
20.0  
9.8  
21.0  
11.0  
Activity in the oil sector (which accounts for about 40% of GDP)  
increased 1.7% in Q2 2018. This illustrates the (small) change in the  
Kingdom’s oil policy. The strategy of OPEC countries and Russia  
aimed at winning market share and boosting prices seems to be  
paying off. The gradual introduction of production caps has enabled  
Brent crude oil prices to rise by almost 50% a barrel since early  
21.0  
529  
23.0  
497  
25.0  
566  
26.0  
658  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDSAR (year end)  
31.0  
37.5  
30.0  
3.8  
33.0  
3.8  
37.0  
3.8  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
017. For the moment, this has not triggered a significant increase  
in output by non-OPEC producers, which would have squeezed  
prices. Yet the oil market situation has changed since the beginning  
of the year. The drop-off in Venezuelan oil production and the  
gradual reduction in Iranian exports have required an extra boost in  
crude oil production from other sources. Given its spare production  
capacity, Saudi Arabia was able to increase crude oil production by  
2
- Real GDP growth  
Total  
Non-oil public sector  
Non-oil private sector  Oil sector  
1
4
2
%
1
5
% between January and September 2018. It will probably build on  
this momentum in the short term with the tightening of sanctions  
against Iran. After declining 3.1% in 2017, we expect oil GDP to rise  
10  
8
2.3% in 2018.  
6
4
As to non-oil GDP, the situation is positive but strikingly sluggish,  
notably in the private sector. Public-sector services (13% of GDP)  
were the main growth engine in the first half of the year. This was  
largely expected since the government returned to a pro-cyclical  
fiscal policy fuelled by higher oil revenues (70% of total fiscal  
revenues in 2017). In 2017, the restrictive fiscal policy stance was  
the main reason for the very weak growth in the non-oil sector,  
which rose only 1% in real terms compared to an average of 5.7%  
between 2011 and 2015. Given our forecast of higher oil prices, this  
fiscal boost is likely to be maintained and serve as a decisive growth  
engine in 2018. According to our estimates, non-oil public sector  
GDP is expected to rise 3.5% this year.  
2
0
-
2
4
-
2011 2012 2013 2014 2015 2016 2017 2018e 2019e  
Source: BNP Paribas  
5
3.4 points, even though this was lower than in the previous month.  
Yet in Saudi Arabia’s case, the significance of this indicator is  
debatable. The very low level of non-oil private sector activity in  
016 and 2017 is not reflected in the PMI index, which has held  
systematically above 53 points.  
Non-oil private sector activity has been trending upwards since the  
beginning of the year, buoyed by the industrial sector (excluding  
refining) and the financial sector (10% of GDP), which is holding to a  
long-term growth trend. In contrast, the construction sector  
contracted 3.2%, confirming a trend in place since March 2016. An  
analysis of high frequency economic indicators confirms a real but  
mild economic recovery. In September 2018, PMI was still upbeat at  
2
Lending to the private sector remains very sluggish (+1% y/y in  
August 2018). Similarly, lending to households increased by only  
% y/y in Q2 2018. Apparently, the traditionally positive impact of  
1
higher public spending on private-sector activity is not as strong as  
EcoEmerging// 4th quarter 2018  
22  
economic-research.bnpparibas.com  
in the past. One of the main explanations for this shift is probably  
labour market reform.  
3
- Saudis employed in the private-sector (in millions)  
2
Painful labour market reforms  
1
1
1
1
.98  
.96  
.94  
.92  
Among the reforms implemented as part of Vision 2030, the  
transformation of the labour market is one of the most advanced.  
The problem has been known for years: the labour market is split  
between well paid public-sector jobs held primarily by Saudi  
nationals (90% of public sector employment) and private-sector jobs,  
the unskilled segment of which is dominated by foreigners. This  
system, which has engendered high unemployment among Saudi  
youth (43% in the 20-24 age group), needs to be reformed due to  
Saudi demographic growth and the increase in female employment.  
1
.9  
1.88  
1.86  
1.84  
1.82  
1
.8  
2016  
Mar-17  
Jun-17  
Sep-17  
Dec-17  
Mar-18  
Government measures can be divided into three categories:  
measures to increase the cost of foreign labour by taxing their  
employers and raising fees on the family members of foreigners; the  
introduction of job quotas for Saudi nationals by sector, and efforts  
to train the Saudi population. One of the most significant measures  
recently was in the retail trade sector, where foreign workers have to  
be replaced by Saudi nationals. For the moment, these measures  
are creating a lot of friction in the labour market, which is a major  
factor behind the economic slowdown. Between early 2017 and  
March 2018 (the latest figures available), about 700,000 foreign  
workers abandoned the labour market, including 234,000 in  
Q1 2018 alone. Over the same period, 94,000 Saudi nationals  
joined the private-sector workforce. Obviously this had an impact on  
private demand (private consumption represents about a third of  
GDP), even though most of the jobs that were vacated were for  
unskilled labour. This labour market trend is likely to persist for  
several quarters, and the negative impact on domestic demand is  
likely to swell. The departure of foreign workers concerns  
increasingly skilled job categories. In the face of this situation, we  
continue to take a cautious approach to our real GDP growth  
forecasts for the non-oil private sector, which are expected to hold  
below 2% through 2020.  
Source: BNP Paribas  
USD 1.4 bn, the equivalent of 0.2% of GDP. Although this was an  
exceptionally bad year, it reflects the structural weakness of FDI in  
Saudi Arabia. In the period 2013-2016, FDI averaged 1.16% of GDP.  
To counter this problem, the government has introduced measures  
under which certain major contracts are required to meet local  
production criteria. This pertains notably to certain sectors of the  
defence industry.  
Labour market reforms aiming to promote jobs for Saudi nationals  
are bound to continue straining economic activity in the medium  
term. This is a particularly big challenge given that the Saudi labour  
market participation rate is fairly low (42% on average).  
Persistent structural constraints  
A major obstacle for Saudi nationals who want to access the  
private-sector labour market is the wage gap with public-sector jobs  
and the low attractiveness of many of these jobs. According to the  
General Authority for Statistics, the average monthly wage was  
USD 2,960 in the public sector, compared to a private-sector  
average of USD 1,920 for Saudi nationals and USD 1,040 for  
foreign workers. From a sector perspective, extraction is the only  
sector in which the majority of workers are Saudi nationals (58%),  
but this sector comprises only 1.8% of the country’s total  
employment. The majority of jobs are concentrated in the  
construction and retail sectors, which account for 39% and 25% of  
total employment, respectively. These are also the sectors in which  
the percentage of Saudis workers is the smallest. Saudi nationals  
account for only 19% of retail sector jobs and 12% of construction  
jobs.  
Foreign investment is one of the driving forces behind job creations  
in the emerging countries. Yet Saudi Arabia’s attractiveness is  
especially low. In 2017, foreign direct investment (FDI) amounted to  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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