Saudi Economy Continues Growth in Q1 2023, PMI Rise to 8-year high in February: FocusEconomics

The economy is likely growing quickly so far in Q1 2023, while the non-oil PMI rose to a near eight-year high in February, boding well for the non-hydrocarbons sector, according to FocusEconomics Consensus Forecast Middle East & North Africa report.

The Kingdom’s average oil production in January was down 2% compared to the same period last year and 7% compared to Q4 2022, boding poorly for the hydrocarbons sector, the report indicated.

It emphasized that the Saudi non-hydrocarbons sector continues to be supported by low inflation and the government’s Vision 2030 diversification reforms, the hydrocarbons sector has been hit by OPEC+ deciding in October 2022 to cut output quotas from November 2022 onward. Recent news suggests this bifurcation will remain ahead: In recent weeks, the government said the current OPEC+ deal would continue until the end of the year and then announced more than $50 billion of investments in local non-oil sector companies.

After clocking the fastest rate since 2011 last year, GDP growth will cool this year on a tougher base effect, lower oil prices, and stagnating oil output. GDP growth in 2023 will be near the average of the past decade. Key factors to watch are U.S. Fed hikes, global economic growth, and unexpected OPEC+ quota changes. FocusEconomics panelists see GDP growing 3.2% in 2023, which is up 0.1 percentage points from last month’s forecast. In 2024, the panel sees economic growth at 3.3%.

Meanwhile, Saudi Inflation rose to 3.4% in January from 3.3% in December. The government’s fuel price cap continues to contain price pressures. Inflation is seen remaining muted in 2023. Key factors to monitor ahead include changes to government subsidies and swings in food prices.FocusEconomics panelists project inflation to average 2.5% in 2023, which is up 0.1 percentage points from the previous month’s forecast. In 2024, the panel sees inflation at 2.2%.

The FocusEconomic report indicated that the Kingdom’s monetary policy is tied to its exchange rate policy, as the top priority of the Saudi Arabian Monetary Authority (SAMA) is to maintain the riyal’s USD peg. As a result, the SAMA generally follows any monetary policy move made by the U.S. Federal Reserve, and this led it to raise the reverse repo rate by 25 basis points to 4.75% on 1 February. Our panelists see the reverse repo rate ending 2023 at 5.15% and 2024 at 3.90%.

Saudi Arabia maintains an exchange rate system with full convertibility and no restrictions on capital flows. The riyal has had a de facto peg to the U.S. dollar since 1986 and has been officially pegged to the greenback at a rate of SAR 3.75 per USD since January 2003. On 3 March, the dollar index was equal to 105, up 1.5% month on month. Our panelists do not foresee any change in the current exchange rate system during the entire forecast horizon.

Saudi Real Sector: PMI hits near eight-year high in February

The Riyadh Bank Purchasing Managers’ Index (PMI) came in at 59.8 in February, up from January’s 58.2. February’s result marked the best performance in nearly eight years. As such, the index moved further above the 50.0 no-change thresholds, signaling a faster improvement in non-oil sector operating conditions than the previous month.

The PMI improved as output, new orders employment, and input purchases rose faster. Demand likely continued to be bolstered by low inflation and the ongoing Saudi Vision 2030 reforms. Looking at prices, input and output inflation rose. Looking at the business sentiment, optimism rose to the second-highest level in two years on improved market conditions.

FocusEconomics panelists project GDP to rise 3.2% in 2023, which is up 0.1 percentage points from last month’s estimate. For 2024, panelists expect the economy to expand by 3.3%.

FocusEconomics Consensus Forecast panelists see non-oil GDP rising 4.5% in 2023, which is up 0.2 percentage points from last month’s estimate. For 2024, the panel expects non-oil GDP to increase by 3.9%.

Inflation increases to over one-year high in January

Inflation in Saudi Arabia has inched up to 3.4% in January, following December’s 3.3%. January’s result marked the highest inflation rate since June 2021. Looking at the details of the release, the change in prices for food and non-alcoholic beverages, as well as housing, rose quicker in January. That said, transport inflation decelerated while prices for clothing fell at a quicker rate.

The trend pointed up slightly, with annual average inflation coming in at 2.7% in January (December: 2.5%).

Lastly, consumer prices rose 0.20% from the previous month in January, coming in below the 0.26% increase recorded in December.

FocusEconomics panelists see inflation easing this year. The government’s petrol price cap, along with higher interest rates and cooling commodity prices, should tame inflation. That said, supply bottlenecks and demand-pull factors remain upside risks.

FocusEconomics Consensus Forecast participants expect inflation to be 2.5% in 2023, which is up 0.1 percentage points from last month’s projection. The panel sees inflation averaging 2.2% in 2024.

Oil prices roughly stable in February as investors remain cautious

The OPEC oil basket traded at $81.9 per barrel on average in February, up 0.3% from the prior month. Meanwhile, on 3 March, the latest date with data available, the price was 1.6% higher on a year-to-date basis and 20.4% lower than on the same day last year.

Crude oil prices were broadly stable in February as investors forwent risky bets. It appears that investors have not yet determined the main price drivers in the oil market in the coming months. Uncertainty remains surrounding the extent to which China’s reopening will boost crude demand and the extent to which the U.S. Fed will hike rates this year.

According to a survey by Reuters, the combined crude oil output of OPEC members rose by 0.15 million barrels per day (mbpd) from January to 28.97 mbpd in February. This mostly reflected higher output in Nigeria. Despite the increase, OPEC was still pumping 0.7 mbpd less in February than it was in September 2022. Reuters said that OPEC’s Gulf producers—Kuwait, Saudi Arabia, and the United Arab Emirates—maintained high compliance with their quotas.

Looking ahead, FocusEconomics panelists see OPEC oil output rising by the end of this year. However, Saudi output is likely to stagnate, as it is already near its quota level. This is likely to hit real GDP growth this year, despite the boost to government coffers from the upward pressure applied to crude prices by lower oil supply.

FocusEconomics Consensus Forecast participants expect Saudi oil production to reach 10.58 mbpd in 2023 and 10.94 mbpd in 2024.