ECONOMY

Saudi Arabia’s non-oil activity has maintained its upward trend, as it expanded 3.4% year on year (yoy), according to the latest data from the General Authority for Statistics (GASTAT). Government activities also rose by 2% yoy. 

The diversification of the Saudi economy is a key pillar of the Vision 2030 strategy. While the overall economy declined 1.7% yoy, seasonally adjusted real GDP grew by 1.4% compared to the previous quarter, following the unveiling of new projects.

Non-oil activities now represent a significant 50% of the GDP, highlighting the success of the country’s economic reforms.

The non-oil private sector’s robust activity continued in the second quarter, showing strong expansion in May, according to the latest S&P Purchasing Managers Index survey. Business activity and new order growth remained healthy due to substantial domestic demand, although the increase in sales was the slowest in over two years.

Following a record high in April, inventory growth remained buoyant as firms prepared for future sales, supported by modest cost pressures, which helped keep inflation low despite increasing competition. 

However, high stock levels led to a slowdown in purchasing growth, the weakest since September 2021.

Business activity increased significantly in May, driven by strong demand and eorts to clear backlogs. Growth was broad-based, with the construction sector experiencing the sharpest expansion. New orders also rose sharply, though at the slowest pace in over two years due to high competition and market challenges. Employment recovered as firms increased activity to meet demand.

“Meanwhile, non-oil private sector firms increased their employment levels in May, offsetting the first decline in over two years in April,” S&P said. “Staffng growth was mostly linked to higher workloads and efforts to reduce outstanding orders, which duly fell slightly.”

S&P added that “cost pressures faced by non-oil firms remained softer than those recorded at the start of the year during May, despite a solid increase in supplier prices and a much quicker rise in employee wages”.

RATINGS AGENCY PRAISES REFORMS

In May, Moody's Investors Service reaffirmed Saudi’s A1 credit rating with a positive outlook, citing the kingdom’s large, wealthy economy, significant hydrocarbon reserves, effective policies, and substantial foreign currency buffers.

Despite cuts in oil production affecting overall economic growth, Moody's expects Saudi Arabia's real GDP to grow by 2% to 2.5% in 2024 and around 5% in 2025, driven by strong activity in the non-hydrocarbon sector. Ongoing diversification projects are expected to support this growth as they are phased and commercialised over time.

Saudi Arabia's economy, the largest in the Arab world, contracted by 1.8% in the first quarter of the year due to a 10.6% decline in oil activities, despite a 2.8% increase in non-oil activities and 2% growth in government activities.

The kingdom is part of the OPEC+ alliance, which vowed to reduce crude output to balance the market. Voluntary oil production cuts remain in place until the end of this year and will gradually unwind from 2025 as global demand grows.

According to Moody's, subdued oil production will impact the government's fiscal balance, resulting to a deficit of 3% to 4% of GDP in 2024-2025, up from 2% in 2023. The agency estimates oil prices will average USD 82 per barrel in 2024 and USD 75 per barrel in 2025. 

Government debt is likely to rise to 30% of GDP by 2025 from 26% in 2023, though the government's strong balance sheet, backed by significant financial assets, will remain robust.

The positive outlook reflects the potential for Saudi Arabia's economic and fiscal reliance on hydrocarbons to decrease significantly over time through reforms and investments in non-oil sectors. This shift will reduce exposure to oil price volatility and global carbon transition pressures, while diminishing the need for increased public spending to support the social contract.

In March, S&P Global also affrmed Saudi Arabia’s sovereign rating and outlook, highlighting social and economic reforms as key to improving the country's prospects.