Saudi Arabia Growth Hits Three-Year Low

EghtesadOnline: Saudi Arabia's economy grew at its slowest rate in more than three years between April and June, government data shows, and some analysts said the figures might be understating the extent of the blow from low oil prices.

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02 October 2016

Growth has been weakening since early 2015 as cheap oil slashes state revenues and pushes the government into spending cuts, which are weighing on the private sector and consumer spending, Arabian Business reported.

Gross domestic product, adjusted for inflation, rose 1.4% from a year earlier in the second quarter of 2016, after growth of 1.5% in the first quarter. It was the slowest growth since 0.3% in the first quarter of 2013.

The oil sector expanded 1.6% from a year ago, slowing from 5.1% growth, while the non-oil sector grew 0.4%, recovering from a fall of 0.7% in the previous quarter. The private sector grew just 0.1% in the second quarter.

The figures suggested the Saudi economy was faring better in the face of oil's slump than many people feared. Nevertheless, analysts said Saudi data could be unreliable—growth for the fourth quarter of 2015 was ultimately revised down to 1.8% from an original estimate of 3.6%--and said there could be a similar revision in this case.

"There's a good chance that the figures will be revised down," said Jason Tuvey, Middle East economist at London-based Capital Economics.

Austerity Pressures

Other indicators such as imports suggested the non-oil private sector may have slowed further than the government data showed, he said.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said she had expected some improvement in the second quarter but that the non-oil sector's positive growth was surprising. She also said second-quarter data for the non-oil sector might eventually be revised lower.

In any case, she said, the economy would remain under pressure from austerity policies for the rest of this year. The non-oil sector looks set to contract for 2016 as a whole, she said.

Fall in Living Standards

Last week, the cabinet announced it was cutting bonuses and other financial perks for public sector workers; since such allowances account for as much as 30% of many Saudis' income, the policy may have a significant impact on consumer spending and saddle banks with more non-performing consumer loans.

The decision to slash ministerial pay by a fifth reflects Saudi Arabia's resolve to nudge its citizens into tolerating a fall in living standards at a time of low oil prices, Reuters reported.

Along with reductions unveiled last Monday that will affect all public sector workers, the cuts also flag to financial markets before a debut sovereign bond issue that the oil exporter is committed to budget discipline.

The measures appear largely to formalize savings introduced ad hoc in parts of the state apparatus since last year, but their announcement on state media, which gave an official start date of Oct 1, is not without political risk.

Rise in Poverty

In a country that has no elections and where political legitimacy rests partly on distribution of oil revenue, the ability of citizens to adapt to reforms aimed at reducing oil dependence and improving self-reliance is crucial for stability.

Some Saudis appeared prepared to accept austerity following the signal that ministers would share the pain, according to Financial Tribune.

"Most of my colleagues are furious, but I see it as normal at such times," said Fahad, 27, a post office worker, who said his monthly take-home pay, including benefits, would fall to 4,800 riyals ($1,280) from 6,000. "The country has given us a lot in the past and it is our duty to show solidarity now."

However, with about two thirds of working Saudis employed by the state, skepticism surfaced on social media. "The beginning of the end!" tweeted a writer using the name Nashat Haider. "Not a rise in efficiency, it's a rise in poverty", wrote Alsheikhah Madawi.

It was unclear how far the steps will trim a budget deficit that reached a record $100 billion last year.