Saudi Arabia: Stronger oil production boosts GDP in Q4 2018
April 1, 2019
Saudi Arabia’s economy expanded at the fastest pace in three years in the fourth quarter of 2018 on the back of increased oil supply. GDP expanded 3.6% year-on-year in Q4, following the 2.4% rise in Q3.
The Kingdom continued to ramp up oil production in Q4, hitting the highest output ever at 10.75 million barrels per day (mbpd). This caused the oil and gas sector to expand 6.0% year-on-year in Q4 (Q3: +3.7% year-on-year), which represented the strongest expansion in three years. Despite inching up compared to the previous quarter, growth in the non-oil sector remained sluggish by historical standards (Q4: +2.0% yoy; Q3: +1.8% yoy). The construction sector contracted for the 12th consecutive quarter, while Saudization—the government’s initiative to reduce unemployment among native Saudis, and which is prompting an exodus of foreign workers—continued to undermine the retail sales sector.
Looking forward, economic growth is expected to decelerate as Saudi Arabia is taking the lion’s share of the OPEC+ oil cut deal. The Kingdom has substantially reduced oil production this year and, in February, the Saudi oil industry pumped just 10.09 mbpd. While the deal is set to expire in June, Saudi Arabia and other countries are calling to extend the agreement until the end of the year in order to support oil prices.
Meanwhile, Aramco’s decision to buy a majority stake in state-run Sabic from the Saudi sovereign wealth fund Public Investment Fund (PIF) for USD 69 billion will represent a massive injection of cash into Crown Prince Mohammed bin Salman’s flagship investment arm. The PIF is the cornerstone of the Saudi Vision 2030, which intends to diversify the economy away from oil. Moreover, state-controlled energy giant Aramco issued international bonds to finance the acquisition of Sabic. This allowed international investors to scrutinize Aramco’s finances for the first time ever, revealing that Aramco is the most profitable company in the world with a net income of USD 111 billion last year. That said, at between USD 1.2-1.4 trillion, credit rating agencies believe that Aramco is worth considerably less than the USD 2 trillion announced by Saudi authorities ahead of a planned sale of 5% of the company in 2018.