Signs of slowing Saudi consumer spending could prove a drag on nation’s economy

Saudi Arabians are not spending as much as some economists have predicted, leading to concerns that consumption in the region’s juggernaut economy could be stalling.

While the kingdom’s economy has been on a roll — helped by firm oil prices — some economists are concerned that higher interest rates and a lack of fresh stimulus may dampen consumption growth. That may have a knock-on effect on the overall economy later this year.

“There are signs that domestic demand is weakening,” said William Jackson, an emerging markets economist at the London-based Capital Economics. “Credit growth has slowed in recent months while non-oil imports — a proxy for consumer spending and investment — continue to fall in annual terms. This data chimes with other low-profile indicators that suggest the consumer spending may not be as strong as people think.”

Capital Economics forecasts that GDP growth in Saudi Arabia will slow to between 3 per cent and 3.5 per cent over the next couple of years, well below the 6 per cent to 7 per cent seen over the past decade. Still, GDP growth in February may have accelerated to 5 per cent year-on-year from 4 per cent at the end of last year, mostly on a rebound in the oil sector, according to Mr Jackson.

Unlike many emerging markets, countries in the Arabian Gulf have been protected from a fall in asset prices this year because of current-account surpluses and currencies pegged to the US dollar.

Despite the recent dip, consumer lending has been on the rise since Saudi Arabia started a $130 billion social spending stimulus package in the aftermath of the Arab Spring in 2011. Loans to individuals rose 21 per cent last year to a record 332bn riyals (Dh325.15bn), according to data from the country’s central bank.

Demand for property loans last year increased 26 per cent while financing for cars advanced 17 per cent, according to the central bank. That may slow with higher US Federal Reserve interest rates next year and the absence of further stimulus by the government of Saudi Arabia.

“Lending is not going to grow at the same rate,” said Paul Wetterwald, the chief economist at Crédit Agricole Private Banking. “Nominal GDP is plateauing somewhat. We are at a very high level and it is difficult to go much higher very quickly. Also, the transfer from the state to the households that followed the Arab uprisings they are not likely to be repeated every year. Oil prices have more or less stabilised, so you don’t have this bonanza of price increases that you can redistribute to the population.”

Mr Wetterwald said he was not too concerned about the rise of US interest rates, pointing out that there was enough demand for credit that higher rates would not pose too much of a constraint. He noted that while the monthly purchasing managers index in Saudi Arabia — a gauge of the non-oil private sector — declined last month to 57 from 58.6 in February, it was still above the crucial level of 50 — a threshold that indicates continued economic growth.

Even though most banks in Saudi Arabia are set to report record first-quarter earnings because of the increase in demand for loans by consumers, Al Rahji Bank, the country’s biggest publicly traded lender, said its first quarter profit fell to 1.71bn riyals from 2.05bn riyals last year because of increased expenses. Demand for credit by businesses has also been easing, leaving the bank with three consecutive quarters of lower profit growth, according to Bloomberg data.

Follow us on Twitter @Ind_Insights