JEDDAH — Saudi Arabian economy remains on strong footing this year due to higher crude production than earlier expected, but it is forecast to slow down next year primarily because of expected decline in oil production, Al Rajhi Capital said in its November report on Saudi economy released Wednesday. However, the Saudi economy is expected to rebound in 2014, it noted. Non-oil sector is expected to remain on solid growth path in the next two years. Fiscal and external surpluses are expected to reach record levels in 2012, afterwards “we expect them to moderate in the next two years,” the report said. Inflationary situation is expected to be stable with downward bias during our forecast horizon. Crude production has averaged around 9.8 mbpd in the first 10 months of 2012 which is higher than the earlier expectation of 9.45 mbpd. “We expect the production to decline to 9.3 mbpd in 2013 and recover to 9.4 mbpd in 2014. We expect nominal GDP to reach SR2354 billion in 2012, an 8.8 percent growth from the last year. However, nominal GDP is expected to be flat next year which will rebound to SR2530 billion in 2014. For real GDP, we expect growth to be 4.9 percent this year and a slow down to 3.3 percent in 2013.” However, the growth is expected to rebound to 4.5 percent in 2014. Government budget surplus and external surplus are expected to reach a new record level in 2012 due to record high level of average daily production in three decades and a record level of average crude prices for the year. Budget surplus is expected to reach SR493 billion in 2012 with total revenue of SR1239 billion and spending of SR746 billion. “We expect the surplus to shrink to SR220 billion in 2013 as revenue comes down. However, surplus is expected to rise slightly to SR232 billion in 2014,” the report said. Trade balance is expected to reach SR944 billion (40 percent of GDP) in 2012 which will decline to SR669 billion (28 percent of GDP) in 2013. However, it is expected to remain flat in 2014 at SR678 billion (27 percent of GDP). Similar trend is expected in current account balance as it will peak in 2012 at SR609 billion (26 percent of GDP) to decline to SR329 billion (14 percent of GDP) in 2013 and SR328 billion (13 percent of GDP) in 2014. The report further said that Saudi crude production has been rising since global recovery started in the middle of 2009. The average daily production was 8.3 mbpd in 2010 which jumped up to 9.3 mbpd in 2011 due to supply disruptions in Libya and other smaller oil producing countries. Even though large portion of supply in Libya has been restored this year, Saudi crude production remains elevated. “Average daily crude production in Saudi Arabia in the first 10 months of 2012 has been 9.8 million barrel per day as reported by Organization of Petroleum Exporting Countries (OPEC). The average production in Jan-Oct period is 6 percent higher compared to the daily average production in 2011.” However, the production has been easing after peaking in June when it crossed 10 mbpd. The latest data available from OPEC shows that the average daily production was 9.7 million barrel in October. “We expect the average daily production to be around 9.7 million barrel in 2012 - higher than our forecast in April which was 9.45 mbpd,” Al Rajhi Capital said in the report. The average crude prices in 2012 have been flat compared to average price in 2011. Average Brent price this year has been $112.1 per barrel compared to $111.3 per barrel last year. Average WTI Nymex crude price has been similar at around $95 per barrel in 2011-12. The average Arab Light prices have been $110.5 per barrel in 2012 - close to our forecast of $112 per barrel in April this year. Global demand and supply dynamics of crude oil market are undergoing a change currently as global growth getting uneven and production in North America is expected to rise in coming years. Growth prospects in the US have improved recently and Chinese economy seems to be turning around for better. However, Europe remains stuck in recession and Japanese outlook has worsened in recent months. The global growth is expected to be 3.3 percent in 2012 which is expected to improve only slightly to 3.6 percent next year (IMF forecast). However, it is expected to pick up in 2014 to reach 4.1 percent. Under such sluggish growth environment this year and the next, demand growth for crude is also expected to be moderate. OPEC expects crude demand to rise by 0.77 mbpd in 2013 to reach 89.6 mbpd. However, with pick up in global growth in 2014, demand growth for crude is also likely to be higher than 0.77 mbpd. On the other side, supply is expected to grow faster as OPEC forecasts non-OPEC supply to increase by 0.9 mbpd in 2013. Half of this expected increase in the crude production will come from North America. This means that the OPEC will need to produce less in 2013 compared to what it has been producing in 2012. In fact the slight decrease has been noticed in OPEC production in recent months, the report noted. Total OPEC production was 31.454 mbpd in August which eased to 31.013 mbpd in September and to 30.946 mbpd in October. Given demand and supply dynamics in the global crude market, we expect that crude production in Saudi Arabia will continue to ease through 2013. We expect crude production to average around 9.3 million barrel per day next year compared to an estimated 9.7 mbpd production in 2012. However, as global growth picks up further in 2014, we expect crude production in the country to turn around. Crude production is likely to be slightly higher at 9.4 mbpd in 2014. On the price front, we expect slight moderation in crude prices in 2013 compared to 2012 but expect to pick up in 2014. Based on fundamentals, we expect Arab Lights crude price to average $102 per barrel in 2013 and $105 per barrel in 2014. Nominal GDP growth The nominal GDP growth in the first two quarters of the current year was robust though it showed moderating trend as expected due to flattening trend in crude production and prices. The nominal GDP grew by 16.9 percent y-o-y and 6.8 percent y-o-y in Q1 and Q2 of 2012 respectively. The moderation was witnessed primarily due to sharp deceleration in oil sector which grew by 25.3 percent y-o-y in Q1 but only 7.3 percent y-o-y in Q2. However, it is worth reiterating that the moderation was mainly due to very high base in 2011. Non-oil sector remain resilient as growth in the sector was 6.7 percent y-o-y in Q1 and 5.9 percent y-o-y in Q2 of 2012 due to robust growth in the non-oil private sector. Non-oil private sector grew 10.6 percent y-o-y and 11.1 percent y-o-y in Q1 and Q2 respectively as against non-oil government sector growth of 0.2 percent y-o-y and -1.8 percent y-o-y during these two quarters. We expect nominal GDP to grow around 8.8 percent in 2012 as we forecasted in April. However, we have revised up growth in the oil sector due to higher average production than our expectation. At the same time, we have revised down growth expectation in non-oil government sector whereas keeping growth expectation in non-oil private sector unchanged. Now we expect oil sector to grow by 9 percent and non-oil government sector to grow by 4 percent whereas non-oil private sector to grow at 11 percent as expected earlier. Looking ahead, we expect nominal GDP to be flat (0.2 percent) in 2013 as we expect crude production to decline and crude price to moderate slightly next year. Oil sector is expected to decline by 6.8 percent whereas growth in non-oil government sector is expected to rebound to 10 percent. Growth in the non-oil private sector is expected to remain robust though slightly lower at 9 percent. “We expect nominal GDP growth to rebound to 8 percent in 2014 as oil sector growth comes back. Oil sector growth is expected to be 5 percent as crude production is expected to be higher along with slight appreciation in crude prices.” Growth in non-oil private sector and government sector are expected to be 11 percent and 12 percent respectively. Economic growth in the first half of the current year was robust as real GDP grew by 5.9 percent y-o-y in Q1 and 5.5 percent y-o-y in Q2 of 2012. Oil sector grew by 7.2 percent and 5.8 percent respectively in the first two quarters whereas non-oil private sector growth was 5.7 percent and 5.5 percent respectively. As crude production has flattened in the second half of the current year, growth in the oil sector is expected to moderate sharply in the second half. “However, we expect non-oil sector to continue its strong performance. Among non-oil sectors, manufacturing remains on strong growth even though it moderated slightly in Q2.” The growth in the sector was 8.4 percent y-o-y in Q1 and 6.9 percent y-o-y in Q2. Growth in construction sector also remained robust as the sector grew 9.1 percent y-o-y in Q1 and 9.3 percent y-o-y in Q2. Wholesale and retail trade grew 6.6 percent y-o-y and 7.8 percent y-o-y in the first two quarters of 2012. However, “financial services, insurance and business services” was laggard as the sector grew by only 1.8 percent y-o-y and 2 percent y-o-y in Q1 and Q2 respectively. Having said that, due to stronger than expected growth in the first half especially in the oil sector, we have revised up our forecast for real GDP growth for the entire year of 2012 from 4.4 percent to 4.9 percent. Looking ahead, we see moderation in economic growth in 2013 due to decline in oil production. However, growth is expected to rebound in 2014 as global growth picks up and consequently crude production in the country inches up. “We expect real GDP growth to moderate to 3.3 percent in 2013 from our forecast of 4.9 percent for 2012 due to decline in crude production. Oil sector is expected to contract by 3 percent whereas non-oil sector is expected to remain on strong growth trajectory.” — SG
