Weekly Insights 1 Nov 2024: Saudi economic growth supported by robust FDI inflow & strong monetary sector

Weekly Insights 1 Nov 2024: Saudi economic growth supported by robust FDI inflow & strong monetary sector

1. GCC growth to rise in 2024 (1.8% from 0.4% in 2023), thanks to non-oil sector growth; inflation inches down

• Economic growth is expected to edge up in the MENA in 2024 (+2.1% yoy) and rise further in 2025 (+4.0%).
• GCC growth is projected to surge in 2025 (4.2%), given expectations that the voluntary oil production cuts will be phased out alongside robust non-oil sector activity.
• The ongoing conflicts in Gaza and Lebanon add to uncertainty. Further escalation of the conflict will weigh on growth for a longer period: IMF estimated that per capita output would be about 10% lower on average a decade after a severe conflict in the region.
• Inflation shows signs of easing in 2024-25, running at close to 2% in the GCC versus double-digits in the MENA region.
• Breakeven oil prices are inching lower: the highest is in Bahrain (USD 135.7 in 2024) versus Qatar at the other end of the spectrum (USD 46.9).
• Fiscal consolidation measures undertaken by GCC are showing up as improvements in non-oil fiscal balances (as % of non-oil GDP).

2. Saudi Arabia GDP grew by 2.8% yoy in Q3 2024 (Q2: -0.3%), following four consecutive quarters of declines

• Saudi Arabia’s real GDP grew by 4.5% in Q3 2024, according to preliminary data, thanks to a recovery in the oil sector (0.3% yoy from Q2’s -8.9% drop).
• Non-oil sector growth has been robust: 4.2% in Q3, though the pace has been slowing in recent quarters (it has averaged 4.2% till Q3 year vs an average of 4.5% in Jan-Sep 2023). Non-oil sector has benefitted from strong domestic demand. Additionally, the government sector grew by 3.1% in Q3 (Q2: 3.6%).
• The IMF forecasts overall GDP to recover (+1.5% yoy in 2024 and further to 4.6% in 2025), as the OPEC+ members are expected to unwind the output cuts from end of this year. Non-oil sector is projected to grow at a faster pace of 3.7% and 4.4% in 2024 and 2025 respectively.
• Non-oil sector growth is driven by strong domestic demand alongside continued investment on giga projects & projects related to various mega events (including many sports events and the Expo). The legal & regulatory reforms including the new new investment law (that comes into effect from next year) and other efforts to encourage FDI inflows (e.g., financial markets, attracting regional HQs) will support non-oil sector activity.
• Risks to the forecast include an escalation in regional conflicts (that could have an impact on oil supplies), slower implementation of reforms (could lead to lower growth rates), faster growth in non-OPEC+ supply and global geo-economic fragmentation among others.

3. Saudi Arabia’s total bank deposits grew by an average 9.0% yoy in Jan-Sep 2024, with government deposits plunging by 6.2%. Credit grew at a faster pace (10.7%), with double-digit gains in private sector claims; SAMA net foreign assets grew (in yoy) for the 7th straight month with commercial banks’ NFA staying negative for 3rd month in a row

4. Saudi Arabia’s FDI inflow stood at SAR 95.98bn in 2023, higher than the target of SAR 83bn as per the National Investment Strategy

• FDI inflows into Saudi Arabia touched SAR 95.98bn in 2023, using new methodology of the Balance of Payments Manual (BPM6) published by the IMF. Outflows were SAR 10.5bn in 2023, leading to net FDI inflows at SAR 85.5bn. A direct comparison with 2022 and 2021 can be misleading since these included a one-off Aramco deal (valued at around SAR 55bn at end-2022 and SAR 49bn at end-2021).
• FDI inflow by economic activities in 2023 showed that four sectors – manufacturing, financial & insurance, construction and wholesale & retail trade – accounted for more than 3/4^th (78.4%) of total FDI inflow in 2023.
• By country, UAE topped in terms of FDI inflow in KSA in 2023: 13.7% of total if UCP nationality is considered (Source: MISA) and 19.2% by direct investor country (Source: GaStat). France and UK were ranked second and third respectively.

5. Inflation moderates in Qatar & Kuwait: contrasting food prices movements (further into deflation in Qatar vs relatively high in Kuwait)

• Inflation in Qatar slipped to 0.82% yoy in Sep (Aug: 1.15%), with prices of food and non-alcoholic beverages declining for the third month in a row at a sharper pace (-3.3% vs Aug’s -0.9%) while recreation & culture costs ticked up (12.6% from 10.7%) as did restaurant & hotel costs (+2.7% from 2.5%). Housing & utilities costs fell for the 13th month in a row. In the period Jan-Sep 2024, headline inflation moderated to 1.4% (from 3.3% a year ago) with the highest upticks seen in recreation & culture (12.9% vs 10.6%) and food (1.9% vs 0.5%); housing & utilities costs plunged (-3.1% vs 6.0% gain).
• Inflation in Kuwait edged lower to 2.75% in Sep (Aug: 2.92%) as prices softened across most categories while health costs rose (4.4% from 3.9%) and transportation costs moved into deflationary territory (-1.6% vs Aug’s 0.5%). Food prices remained relatively high: 5.8% from Aug’s 6.0%. Overall inflation clocked in at a lower average of 3.0% in Jan-Sep 2024 vs 3.6% in Jan-Sep 2023: compared to a year ago, health, education and communication costs increased (to 3.6%, 0.9% and 2.4% respectively); while food prices eased, it stayed relatively high (5.6% vs 6.6% in Jan-Sep 2023).

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