Saudi Arabia: The oil sector propels economic growth in Q3
December 31, 2018
Saudi Arabia’s economic recovery gathered steam in the third quarter on the back of higher oil prices and increased crude oil production. GDP expanded 2.5% year-on-year in Q3, following the 1.6% rise in Q2 and marking the best result in two-and-a-half years.
The Kingdom ramped up production in the July–September period in order to offset declining output in Iran and keep global oil markets adequately supplied. The United States was piling pressure on Iran’s trade partners to cut down purchases of Iranian oil to “zero” by 4 November, when the bulk of the new sanctions had been planned to be reimposed. As a result, crude oil production in Saudi Arabia jumped from an average of 10.11 million barrels per day (mbpd) in Q2 to 10.42 mbpd in Q3. Fears that increased oil production by key players, mainly Russia and Saudi Arabia, was not enough to compensate for the drop in output in Iran put upward pressure on oil prices. Therefore, the average price of the OPEC oil basket rose from USD 72.0 in Q2 to USD 74.1 in Q3. Against this backdrop, growth in the oil and gas sectors rose from 1.3% in Q2 to 3.7% in Q3, marking the best result in nearly two years. On the downside, economic dynamics in the non-hydrocarbon sector moderated from a 2.4% increase in Q2 to a 2.1% rise in Q3. That said, the deceleration came entirely from the non-oil public sector, suggesting that authorities took their foot off the pedal following several quarters of stimulus, although growth in the non-oil private sector in Q3 still remained sluggish compared to historical figures. Saudization, the government’s initiative to reduce unemployment among native Saudis, is prompting an exodus of foreign workers this year, likely impacting the performance of the private sector, especially that of retailers.
From the expenditure point of view, economic growth was fueled by an acceleration in gross fixed capital formation (Q2: +5.2% year-on-year; Q3: +8.9% yoy) and robust government spending (Q2: +7.5 yoy; Q3: +7.6% yoy). Conversely, private consumption growth moderated from 2.5% in Q2 to 1.6% in Q3. Exports of goods and services benefited from healthy dynamics in the oil market and expanded 8.0% in Q3 (Q2: +7.0% yoy). Improved domestic activity boosted imports, which rose 7.2% (Q2: -6.5% yoy).
In the accompanying release to the 2019 budget unveiled on 18 December, Finance Minister Mohammed al-Jadaan announced that the economy likely expanded 2.3% in the full-year 2018, implying a growth rate of around 4.0% for the final quarter of 2018.
Looking ahead, the recent fall in oil prices, the agreement to cut oil output in 2019 and weaker prospects for the global economy all threaten Saudi Arabia’s economic recovery. Moreover, geopolitical risks remain large, with the country engulfed in a war in Yemen and the killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul rattling relations with the West. That said, the Saudi government approved an expansionary budget for 2019, which should shore up growth this year.