Saudi Arabia consumer spending to pick up as economy improves

Kingdom's GDP to grow 1.6% in 2018 according to BMI, after 0.5 per cent contraction in 2017

Female shoppers wearing traditional Saudi Arabian dress browse watches on sale at a luxury concession stand inside the Kingdom Centre shopping mall in Riyadh, Saudi Arabia, on Friday, Dec. 2, 2016. Saudi Arabia is working to reduce the Middle East’s biggest economy’s reliance on oil, which provides three-quarters of government revenue, as part of a plan for the biggest economic shakeup since the country’s founding. Photographer: Simon Dawson/Bloomberg

Consumption in Saudi Arabia will improve this year due to a roll back of some government austerity measures and an uptick in economic growth in the Arab world's biggest economy, according to BMI Research.

Private consumption is set to increase 2.5 per cent in 2018 from  1.5 per cent in 2017, according to BMI, a unit of rating agency Fitch. The rise comes as the kingdom’s economy is forecast to grow 1.6 per cent this year, after contracting by 0.5 per cent in 2017, it said.

"Over 2018, we hold an improved view for Saudi Arabia's consumer outlook, owing to more favorable economic conditions," BMI said.

But the research firm  said that the growth in personal spending would remain tepid as inflation returns following the kingdom’s fiscal reforms and the partial recovery of oil prices. The country's economic diversification efforts are unlikely to pick up significantly soon and won't give a boost to consumption over the short term, BMI predicted.

Consumer prices rose 3 per cent on a year-on-year basis in January and 3.9 per cent from December, according to official data.

Saudi Arabia, the world's largest exporter of crude oil, embarked two years ago on an ambitious economic transformation plan - dubbed Saudi Arabia Vision 2030 - to lessen its reliance on revenue from hydrocarbons,  as the price of oil started to slump from 2014. The government is also striving to get women to play a greater role in the economy by giving them more rights, such as allowing them to drive.

Reform efforts  include a reduction of subsidies on fuel and electricity and the implementation of a 5 per cent VAT, which have crimped disposable incomes.

To temper the impact of rising prices, the government started cash transfers to households deemed the most vulnerable under the Citizens' Account Programme in January 2018. In the same month, the government said some civil servants would receive an extra 1,000 Saudi riyal per month for 2018.

The move was subsequently replicated by oil company Saudi Aramco, alongside other major companies including AlRajhi Bank, National Commercial Bank and Saudi Electricity.

The government will continue to rationalise spending, despite the reversal of some austerity measures, and that will slow down  growth in the non-oil sector, the research firm said.

“As a result, we expect employment to slow down in the market over the coming months,” it said.


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BMI is forecasting unemployment to average 6 per cent from this year until 2022. In 2017, the unemployment rate was 5.8 per cent, it said.

The reduction of energy subsidies, coupled with rising oil prices and the impact of VAT may constrain consumption as prices rise, with Saudi Arabian households feeling the pinch when it comes to transportation and utilities costs, the research firm noted.

In the wider economy, BMI forecasts that the country’s commercial infrastructure segment will achieve an annualised real growth rate of 6.1 per cent over the next five years as the economic diversification drive gathers momentum.

Such growth will be driven by government initiatives including the desire to increase the number of ‘umrah’ pilgrims to 30 million by 2030 from 7.5 million in 2016, the establishment of Special Economic Zones throughout the country, and increasing the share of non-oil GDP from 16 per cent today to 50 per cent by 2030.

“We expect that Saudi Arabia’s commercial segment will continue to grow its share of the kingdom’s broader infrastructure development pipeline in the years ahead, with our Key Projects Database indicating that the country’s commercial sector already accounts for 17 per cent of total infrastructure market share," BMI said.