JEDDAH – Saudi Arabia's quarterly GDP growth eased slightly to 5.9 percent y-o-y in 1Q12 from 7.4 percent y-o-y in 4Q11, due to a moderate growth in the manufacturing sector. Nevertheless, the quarterly real GDP growth is still considered robust supported by an expansion in the oil sector, KFH-Research said in a report. The Kingdom's oil sector is still faring well on the back of increasing crude oil production. Its monthly crude oil production remained the highest as compared with other OPEC countries at 9.8 million bpd in June 2012 (May 2012: 9.9 million bpd). The oil sector contributes is expected to remain strong and will support the Kingdom's real GDP growth at 6.0 percent y-o-y in 2012. Saudi's leading indicator purchasing managers' index (PMI) eased slightly to 59.7 in June 2012 from 60.4 in May 2012. Despite the easing, it is still considered a robust number as it maintains at above 50.0 thresholds which reflects strong domestic demand conditions in Saudi's non-oil sector. Government induced consumption underpinned by wage and pension hikes is the major driver for the strong domestic demand. Industrial output is also benefiting from government demand and social housing contracts. New orders sub-index moderated by one percentage point to 69.0 in June 2012. However, the output growth, exports order, and employment sub-indexes expanded with almost one third of all companies reporting increased production. Saudi's consumer price index (CPI) based inflation moderated to 4.9 percent y-o-y in June 2012 from 5.1 percent y-o-y in May 2012 due to declining food and housing prices. Prices of food and beverages segment (the largest contributor of CPI basket at 26.0 percent) moderated slightly to 4.7 percent y-o-y in June 2012 from 4.8 percent y-o-y in May 2012. This is in line with easing global food prices as continued economic uncertainties and generally adequate supply prospects kept international prices of most commodities under downward pressure. Inflation is expected to edge down in 2H12, averaging 4.7 percent y-o-y for 2012 (2011: 5.0 percent) mainly due to falling global food and other commodity prices and a stronger US dollar, which the Saudi riyal is pegged. Moreover, Saudi key policy rates (repo and reverse repo rate) are approximately parallel with the movements in the US interest rates. Nonetheless, the Saudi Arabian Monetary Agency (SAMA) will maintain a small premium on US rates, given Saudi's concern about inflation. The government has extended financing guarantees to banks offering loans to small and medium-sized enterprises. Additional initiatives aimed at increasing lending to the private sector, including by the five state-backed specialized credit institutions, will also probably be forthcoming, especially if the euro-area debt crisis continue to worsen, the report said. It further said the Saudi government's fiscal target to record a budget surplus of SR12 billion in 2012 is realistic and achievable since Saudi crude oil production figure is still high and has the highest estimated capacity at 12.0 million bpd among the OPEC countries. Higher oil revenues will lift the Kingdom's fiscal position. Oil revenues contributed 90 of budget revenues, which are now expected to reach an all-time high of SR1.2 trillion in 2012. However, despite rising oil revenues in the recent years, the Kingdom still faces some downside risks, including a high unemployment rate (officially 10.8 percent for Saudi nationals in 2010) due to rapid population growth. Furthermore, a need to improve infrastructure and rising social spending continues to add to the pressure for high government expenditure, the report noted. – SG
