February 2024

The Saudi Economy in 2024-25

 Saudi Arabia’s non-oil economy continues to expand at a brisk
pace. The authorities’ preliminary estimate puts non-oil GDP
growth at 4.6 percent in 2023 and we see an acceleration to 5
percent-plus in the next two years. Growth will be driven by both
consumption and investment, with net exports a drag—at least
this year. Consumer price inflation should remain contained,
though project cost overruns are likely.

 Higher project costs reflect a tight market for labor and materials.
The disruption to Red Sea shipping is an added headwind, with
reports that costs for key construction inputs in the Saudi market
are up by 25-50 percent in recent weeks. A material reduction in
Red Sea turmoil will likely require intensified pressure on Iran,
both from the US and China. That said, even if Red Sea
shipping returns to normal in the near term, cost overruns are
still likely given the sheer number of projects under construction.

 The Saudi authorities are likely to keep oil production in check in

the face of a weak demand outlook. The US economy has
shown remarkable resilience, but the Eurozone now appears to
be in recession and China’s economy is struggling. A number of
large Emerging Markets are also feeling the pressure of high
interest rates. Non-OPEC supply is set to increase, even though
we see the rate of US output growth slowing. For these reasons,
Saud Arabia is likely to roll over last year’s cuts to the end of Q3-
24. By then the US Fed should be in rate-cutting mode, which
should give a boost to economic activity and the price of risk
assets, such as commodities.
For comments and queries please contact:
 This conservative approach should be enough to see Brent
James Reeve
Chief Economist average $81 per barrel (pb) in 2024, with Saudi Arabia’s main
[email protected] export blend continuing to trade at a $2-$3 pb premium over the
benchmark. Global economic activity should gather pace in 2025
Nouf N. Alsharif
Managing Director, Research as rate cuts continue, and with US output growth slowing Brent
[email protected] should average $86 pb.
Head office:

Phone +966 11 279-1111 Figure 1: Change in Real GDP

Fax +966 11 279-1571
P.O. Box 60677, Riyadh 11555
Kingdom of Saudi Arabia GDP Oil GDP Non-oil GDP
www.jadwa.com 16
14
Jadwa Investment is licensed by the Capital 12
Market Authority to conduct Securities 10
Businesses, license number 6034-37. 8
6
(percent)

View Jadwa Investment’s research archive and 4

sign up to receive future publications: 2
http://www.jadwa.com 0
-2
-4
-6
-8
-10
2024F

2025F
2015

2016

2017

2018

2019

2020

2021

2022

2023

Released: February-26-2024, 17:00 UTC+3

February 2024

Global Economic Outlook

Last year’s global growth performance turned out to be pretty weak.
At 2.7 percent, GDP growth was significantly below the 3.4 percent
recorded in 2022, as well as the pre-pandemic ten-year average of
3.2 percent.

Yet the reasons for the downturn were not the ones that many had
Global GDP growth was weak last identified at the start of the year. The US, which was most people’s
year, though not for the reasons favorite to tip into recession, showed remarkable resilience with a
many expected. The US vibrant labor market apparently impervious to the impact of higher
outperformed expectations while interest rates—a dynamic that has continued into 2024. Many firms,
China disappointed. recalling how difficult it was to attract and retain labor in 2021-22,
decided to hang on to workers even as orders fell. This approach
allowed the country to record growth of 2.5 percent, according to the
IMF. Meanwhile, China—which many had identified as the likely
engine of global growth—disappointed, with a hesitant consumer
unwilling to spend in the face of serious strains in the property
sector. The country grew by 5.2 percent according to the authorities,
but this did not constitute the big bounce-back from Covid lockdowns
that many had been counting on (Table 1; Figure 2).

Meanwhile, the Eurozone could only manage 0.5 percent growth

The Eurozone is struggling, with according to the Fund, as a widespread cost-of-living crisis weighed
Germany under particular heavily on consumption, particularly of goods. Southern European
pressure. countries did better than expected, thanks largely to increased
tourism inflows. Germany suffered more than most as higher energy
costs hit industrial production and exports to China faltered.
A number of large EMs are also Emerging Markets also struggled, with political uncertainty and high
feeling the strain of high interest interest rates pressurizing growth in large EMs such as Brazil, South
rates. Africa, Turkey and Poland. The main exception was India which is
rapidly replacing China as the engine of EM growth (the IMF puts
India’s 2023 growth at 6.7 percent).

Much of the pain of last year was caused by high interest rates. The
In the US, inflation is now rapidly US Federal Reserve raised its policy rate by a cumulative 100 basis
easing and traders are positioning points to 5.5 percent in a bid to pull inflation back towards its 2
themselves for interest rate cuts by percent target. There are different measures of inflation in play, but
the Fed. price pressures are clearly moderating and the Fed can take some
satisfaction from that. Whether a “soft landing” can be engineered,
whereby growth slows but does not go into reverse, is still a matter of
debate, but it seems more likely than not.

We expect rate cuts to begin in Still, a slowdown is inevitable and many traders are already
June. We see 100 basis points this positioning themselves for the Fed to reverse course and begin
year and a further 100 bps in 2025. cutting rates again. The current consensus is May, though we think
SAMA is expected to follow in June is more likely (Figure 3). From there we expect 100 basis points
lockstep, meaning that the of cuts, and a further 100 bps in 2025, leaving the upper bound of
Reverse Repo will end 2025 at 3.5 the Fed Funds Target Rate at 3.5 percent. SAMA will follow in
percent. lockstep, meaning that the Reverse Repo will end next year also at
3.5 percent.

These rate cuts should change the economic mood quite markedly in
2024. One positive of high rates is that there is plenty to cut, and
when this process starts it should provide a spur to both
consumption and investment, while also lifting risk assets (including
oil). Rate cuts also seem likely in the Eurozone, probably before
June, while China is also set to provide some (fiscal) stimulus to its
sluggish economy. The global GDP growth outlook will clearly be
influenced by whether the US can avoid a recession. Assuming it
does, and the Fed cuts from June, then growth should come in at
around 3 percent, with a relatively vigorous performance in H2. For

2
February 2024

The US is now more likely than not 2025, we see a further acceleration to 3.4 percent (above
to avoid a recession. Assuming it consensus).
does, then global growth should
come in at around 3 percent this There are a number of clear risks. It is possible, though not yet
year, with most of the acceleration probable, that the lawlessness in the Red Sea will have a material
in H2. impact on inflation. We think the impact will be contained because
other shipping lanes are unclogged (unlike in 2022) and although
goods might take longer to reach their destination, the chances of a
major rupture to supply chains seem low (Box 1). For the US, the
path to interest rate cuts could be bumpy: even now the labor market
Risks center on the impact of Red remains the tightest in history, and producer prices have recently
Sea disruption, a possible US accelerated. That might well give the Fed further pause, possibly
recession, and a large number of delaying rate cuts until well into H2. Meanwhile, political risk remains
elections. elevated, with a large number of elections scheduled for the year,
and areas of military conflict (potential and actual) apparently
multiplying. Even a dramatic cut in interest rates might not be enough
to shift this cloud of tension and uncertainty.

Table 1: Global GDP Growth

(percent; IMF and consensus projections)

2022 2023E 2024F 2025F

Con- Con- Con-
IMF IMF sensus IMF sensus IMF sensus
Global 3.5 3.1 2.9 3.1 2.5 3.2 2.8
US 1.9 2.5 2.5 2.1 1.4 1.7 1.6
UK 4.3 0.5 0.4 0.6 0.4 1.6 1.2
Canada 3.8 1.1 1.1 1.4 0.5 2.3 1.8
Euro zone 3.4 0.5 0.5 0.9 0.6 1.7 1.4
Japan 1.0 1.9 1.8 0.9 0.9 0.8 1.0
China 3.0 5.2 5.2 4.6 4.6 4.1 4.3
Russia -1.2 3.0 2.6 2.6 1.4 1.1 1.1
Brazil 3.0 3.1 2.9 1.7 1.5 1.9 2.0
India 7.2 6.7 6.7 6.5 6.3 6.5 6.4
Note: Consensus forecasts are those of FocusEconomics.

Figure 2: Global Economic Growth Outlook Figure 3: US Interest Rate Probability Survey

Global economy Cut No Change

8 Emerging markets
Advanced economies 100%
6 80%
4
60%
(percent)

2
40%
0
-2 20%
-4 0%
1-May-24

18-Sep-24
31-Jul-24
20-Mar-24

12-Jun-24

18-Dec-24
7-Nov-24

-6
2015
2016
2017
2018
2019
2020
2021
2022
2023E
2024F
2025F

3
February 2024

Oil Market Outlook

What does this growth outlook mean for oil prices? Traders have
been largely unmoved by the attacks on Red Sea shipping (Box 1)
with many calculating that re-routing of crude does not mean lost
crude.

Oil traders might be right to This attitude makes sense, but traders also seem blasé about the
discount the impact of Red Sea potential impact of the 1.2 million barrels a day (bpd) in OPEC Plus
turmoil on oil supply, but they could production cuts announced in November last year. Skepticism is
be under-estimating OPEC Plus. understandable given the historical unwillingness of smaller
producers in particular to fulfill their pledges, but even if only half of
these cuts come to pass this would still mean a material tightening of
balances. The level of compliance emerge in the coming weeks as
production figures are released, though early data from Bloomberg
point to strong discipline from OPEC members in January (Figure 5).

Box 1: The Economic Impact of Red Sea Turmoil

Three months of missile and drone attacks on container traffic in the
Red Sea have had a pronounced effect on shipping routes, but so
far little impact on global inflation or oil prices. Might this change?

The attacks by Yemen’s Houthis have led many shipping firms to re-
route traffic around the Cape of Good Hope rather than risk the Red
Sea and Suez Canal, a route that used to account for 12 percent of
the world’s seaborne trade. The re-routing is adding an average of
The Red Sea attacks have caused four weeks to trips from East Asia to Europe and back. Inevitably,
major disruption to international this has pushed up shipping costs, be they man-hours, fuel costs or
shipping. However, the impact on insurance, with overall freight costs up by almost 30 percent, year-
inflation has so far been muted. on-year, in January (Figure 4).

For the moment, these higher costs have not shown up in retail
prices, but some large European retailers, such as supermarkets,
are warning that they could well do. The ECB President has cited
the return of “supply bottlenecks” as a key risk to the path of
European interest rates. Yet unlike in 2021-22, when global supply
chains snarled up and inflation surged, this time around there is no
accompanying surge in demand. If anything, global activity is cooling
and therefore the impact on wholesale and retail prices is likely to be
modest. That said, there have been reports of higher input costs for

Figure 4: The cost of global container freight has Figure 5: OPEC Production
surged

3000 30,500
($ / forty foot container)

(thousand barrels/day)

2500 29,500
2000
28,500
1500
27,500
1000
500 26,500

0 25,500
Mar-23
Feb-23

Apr-23

Jul-23

Oct-23
Nov-23
Jan-23

Jun-23

Aug-23
Sep-23

Jan-24

24,500
Jan-21 Jan-22 Jan-23 Jan-24

4
February 2024

Saudi construction firms stemming from the shipping disruption.

Increases in key input costs are in the region of 25-50 percent.

What about oil prices? So far, there has been little impact. Gulf crude
bound for East Asia is untroubled, while Gulf oil heading for the US
already goes around the Cape of Good Hope. Europe is
experiencing the most fallout, with a marked shortage of diesel. Still,
over time, this should be ameliorated by additional US imports.
Oil prices have been largely
unmoved by the turmoil. A Oil prices would naturally get a sustained upward jolt if there was an
sustained surge in prices would escalation in hostilities. Already the Gaza crisis has drawn in a
probably require a disruption in the number of proxies, but now state actors such as the US, Israel, Iran,
Strait of Hormuz, which seems Iraq, and Pakistan are exchanging (limited) blows. Still, it would
very unlikely. probably take a disruption in the Strait of Hormuz to push oil prices
significantly higher. This still seems very unlikely.
An end to the Houthis’ activities probably lies through intensified
pressure on Iran. This could take the form of stepped-up covert
operations by the US, or more straightforward diplomacy from China,
where exporters are feeling the squeeze of delays to their European
shipments.

However, OPEC Plus is only a part of the supply story, and a

decreasing one at that. According to the International Energy
Agency (IEA) almost all of the additional 1.5 mbpd of supply that it
Non-OPEC countries are set to forecasts this year is set to come from non-OPEC countries, most
drive supply additions, though we notably the US, Brazil, Canada, and Guyana. Here, it is the US
see US output growth slowing this which is key (it is already the world’s biggest oil producer). We think
year and next. US output growth will slow to around half last year’s gain, with recent
consolidation in the shale sector offering better margins, but not
more output, especially as much of the best shale acreage has been
exploited. In addition, a number of independent producers have
struggled for finance in the face of high interest rates. The recent
blast of cold weather in North America is also likely to impact oil
operations. Yet the ingenuity of US shale drillers should not be
discounted and a further surge in US output remains a risk to oil
prices.

OPEC Plus output is unlikely to As for OPEC Plus supply, the weak demand backdrop (see below)
see meaningful growth before suggests that the group will extend its cuts at least until end-Q3. By
Q3-24. then, risk assets such as commodities should be buoyed by interest
rate cuts and OPEC Plus will begin to unwind its quotas, albeit
gradually.

What of demand? OPEC expects 1.8 mbpd in growth this year, but
The demand outlook is weak, at this seems overly optimistic. This is some way above the pre-Covid
least for H1-24. 10-year average of 1.3 mbpd, and it is difficult to see where the
additional demand boost will come from, at least in the first half of
the year. The US might avoid a recession, but it is unlikely that its oil
demand will actually accelerate. China’s oil demand is likely to be
China’s oil demand might surprise
on the upside, but European de- better than many expect: despite its travails, property construction is
mand will remain soft. still expanding following the 2021 boom in off-plan sales. Transport
and logistics is also growing briskly. Yet confidence is low, and much
will depend on how much fiscal stimulus the government chooses to
deploy.

Europe is displaying strong demand for certain oil products, but

economic weakness will weigh on overall crude demand there. After
all, Germany is the world’s sixth biggest oil importer and it is in

5
February 2024

recession. Even India is likely to see some softening in oil product

Japan and some East Asian EMs demand in 2024 following explosive growth in 2023. More positively,
should provide support to demand Japan’s economy is accelerating and there should also be decent
growth. India should too, though demand from a clutch of fast-growing East Asian EMs, particularly if
the explosive growth of last year is the USD weakens (as expected) in H2. Saudi Arabia, too, should
likely to cool. see a rebound in demand given strong projected growth in both
construction and transport (see below).

Overall, however, the demand outlook is uninspiring and much will

therefore hinge on OPEC Plus discipline and US shale supply. As
Even if OPEC supply discipline is
better than expected, it is still indicated above, we see OPEC commitment surprising on the
difficult to be positive about oil upside, though this also reflects beaten-down expectations. The first
prices this year. We expect Brent quarter is traditionally a time of refinery maintenance and thus stock
to slide to an average of $81 pb in builds, so the impact of OPEC Plus cuts might not become fully
2024. apparent until Q2. H2 should see stocks come down more decisively
as demand gets a lift from interest rate cuts.

Notwithstanding the better H2 outlook, we have decided to reduce

our oil price forecast for the year. We now see Brent averaging $81
The outlook for 2025 is better. pb in 2024, a significant downward shift from our previous forecast.
Lower interest rates should boost The outlook for 2025 is somewhat better given the continuation of
economic activity and reduced interest rate cuts, though the impact will be offset to some extent by
shale output growth will also
an expected relaxation of OPEC Plus quotas. These trends should
support prices. We see Brent
averaging $86 pb next year. see Brent average $86 pb next year. Note that Arab Light, which is
Saudi Arabia’s main export blend, should continue to enjoy a $2-$3
pb premium over Brent given strong middle distillate demand,
especially from East Asia.

Risks are tilted to the downside and center on larger-than-expected

Risks are skewed to the downside non-OPEC supply. A US recession, which would have a severe
and center on the US. impact on global oil demand, also cannot be ruled out. As noted in
Box 1, upside risk stems from any escalation of Red Sea terrorism or
broader conflict in the Middle East (as unwelcome as that would be
for virtually every other metric), while meaningful and prolonged
fiscal stimulus in China would also help lift oil demand.

Saudi Economic Performance

The Saudi economy contracted last year for the first time since 2020.
Saudi GDP contracted by 0.9 Output fell by 0.9 percent according to the authorities’ provisional
percent last year, the first fall since (“flash”) estimate, with cuts to oil production explaining almost all of
2020. This was due almost entirely this. According to the estimate, “Oil Activities” fell by 9.2 percent in
to a further fall in oil output. 2023, more than offsetting the impact of a 4.6 percent gain from the
non-oil sector. These oil supply cuts were the mirror image of 2022
when a large increase in liquids supply drove an 8.7 percent surge in
overall GDP.

What this volatility misses is the underlying strength of non-oil GDP

growth, which has averaged 6 percent over the past three years.
Non-oil activity remains vibrant. It
Non-oil GDP now accounts for almost 60 percent of real GDP, up
expanded by 4.6 percent in 2023
and has averaged 6 percent in the from 55 percent five years ago. It is more broad-based than in 2018,
past three years. with sectors such as Tourism, Hospitality, Retail, Non-Oil Mining,
and Energy all developing rapidly. Whereas five years ago non-oil
activity was largely a function of central government spending, today
the Public Investment Fund (PIF), National Development Fund
(NDF) and private investors are all deeply involved in the Vision
2030 push.

6
February 2024

There has also been a shift in GDP by expenditure. In 2018 private

consumption accounted for less than a third of real GDP; in 2023 it
contributed 40 percent (Figure 6). This reflects both population
Investment is currently very growth (roughly 2 percent a year for nationals) and the entry of
important to the growth story, but women into the workforce. Female labor force participation is now
the non-oil economy is actually around 36 percent, which is well ahead of target, but still provides
shifting towards consumption. plenty of room to grow (the average for OECD countries is 55
percent). The transition towards a more consumption-based
economy would have been more distinct had it not been for the
surge in investment related to the Vision 2030 agenda. Investment
has grown by an annual average of 7.2 percent since 2018 (and that
includes the “Covid years” when investment sagged).

The driver of growth last year was Domestic Trade (encompassing

Retail, Wholesale and Hospitality). The importance of this sector has
been clear for some years now. In real terms, it has grown by an
This can be seen in the strong annual average of around 5 percent over the past five years (albeit
performance of Domestic Trade. with Covid-related volatility). The sector will continue to benefit from
female labor force entry, rising tourist numbers, and higher wages,
while personal unsecured debt is just 12 percent of GDP. Associated
sectors such as Transport, and Electricity should be pulled along by
this engine.

Construction is another obvious support to the non-oil growth

outlook, given the giga-project rollout and associated developments
Construction has naturally such as Expo and the football World Cup. The main drag here is the
benefitted from the “giga-projects” scarcity of inputs, such as building materials and manpower, with the
surge. It should get a further boost January PMI registering a sharp increase in costs for all non-oil firms
as mortgage rates begin to ease in (Figure 7). Some of this relates to Red Sea disruption, and some to
H2. the sheer number of projects under way. Assuming these shortages
can be alleviated (through higher wages and a loosening of labor
regulations for example) then Construction should get a further boost
from a revival of mortgage demand in H2 once the US begins to cut
interest rates.

Oil GDP is set for a further year of Oil GDP is set for another fall. We now think that the Kingdom’s oil
contraction. production cuts from last year—totaling 1.5 mbpd—will be rolled over
until the end of Q3 this year, meaning that annual output is likely to
contract by 1.8 percent (see below).

Taken together, we expect real GDP growth to rebound to 2.3

percent this year, following last year’s 0.9 percent contraction, with

Figure 6: Real GDP by Expenditure Figure 7: PMI Input Costs

(percent share) (>50=month-on-month expansion)

Purchase prices Staff costs

58

56

54

52

2018 2023 50
May-23
Apr-23
Feb-23
Mar-23

Jul-23

Oct-23
Jan-23

Aug-23
Sep-23

Nov-23
Dec-23
Jan-24
Jun-23

Investment
Government consumption
Change in stocks
Private consumption Net exports

7
February 2024

An expanding non-oil sector and the fall in oil GDP more than outweighed by a 5.1 percent gain in non
contracting hydrocarbons sector -oil GDP. Non-oil dynamics are unlikely to change much in 2025 and
adds up to 2.3 percent real GDP we expect a 5.2 percent gain. With oil GDP bouncing back by almost
growth this year. An acceleration to 8 percent, this should see overall GDP accelerate by almost 6
5.8 percent is in prospect for 2025. percent. The main risk to the outlook is increased costs. It is telling
that the January PMI flagged not just rising input costs, but also a
slowdown in growth momentum across the non-oil economy.
Risks to growth center on rising
costs. Table 2: Real GDP Shares and Growth Rates
2023 2021 2022 2023 2024F

% Share of: % year-on-year

Overall GDP 4.3 8.7 -0.9 2.3

Oil sector 37 0.2 15.4 -9.2 -1.8
Non-oil activities 47 8.1 5.5 4.6 5.1
Govt. activities 13 1.1 4.6 2.1 2.3
Non-oil GDP by sector 100 % year-on-year
Agriculture 6.0 2.5 4.0 3.7 3.2
Non-oil mining 0.8 -1.9 6.5 6.0 5.0
Non-oil manufacturing 18.1 5.1 8.0 0.5 2.1
Electricity, gas and water 2.6 4.0 1.4 3.6 3.0
Construction 9.2 1.2 8.7 3.9 5.5
Wholesale & retail trade 21.8 16.3 5.7 6.9 8.0
Transport & communication 11.8 3.5 1.9 7.7 6.4
Real estate activities 11.2 5.6 1.3 1.2 3.6
Finance, insurance, & bus. 11.2 11.7 11.2 5.2 4.5
Community & social services 7.3 18.9 2.8 12.6 7.1
Note: Non-oil GDP by sector for 2023 (growth and shares) is the year-to-Q3 2023
average. Overall GDP in 2023 also includes net taxes.

Hydrocarbons sector

It has been a tough few years for the hydrocarbons sector in terms of
its contribution to GDP growth. Oil production fell in four of the past
five years as the Kingdom adjusted output to match generally weak
The hydrocarbons sector has demand and brisk non-OPEC output. And, as noted above, oil
contracted for four of the past five production is expected to fall by a further 1.8 percent in 2024 before
years. rebounding in 2025. Oil GDP is not all about crude production: there
has been some offset from gas activities and refining. Thus, “Oil
Activities” GDP saw a marginal increase in 2021 despite a fall in
crude output, for example.

A large amount of the Kingdom’s refined products head to Europe,

Policy-mandated crude production where diesel is in extremely short supply (again). Saudi Arabia could
cuts are the main reason, though theoretically meet some of this demand by shipping from its west
there has been no offset from oil coast (out of the reach of Houthi activity) and through the Suez canal.
refining given logistical difficulties However, disruptions are such that there appear to be shortages of
in supplying Europe, Saudi appropriate tankers. This might be resolved in the next few months,
Arabia’s main products market. but for the moment we are assuming flat refining output this year.

Gas development has more potential given its importance as a

“bridge” in the energy transition and a key feedstock for various
industrial projects. The discovery of two new fields in the Empty
Quarter in November last year is important because they are “non-
associated” with oil, meaning that the gas can be produced without
heed to OPEC Plus quotas. These finds come on top of the
development of Jafurah, the Kingdom’s biggest unconventional non-
associated gas field.

8
February 2024

In fact, gas is now looking like the most likely medium-term growth
engine of the hydrocarbons complex given the recent announcement
In the medium-term, gas by Aramco that it will be ceasing its efforts to boost sustainable oil
development could actually production capacity to 13 mbpd. Aramco is expected to provide an
become the engine of update on its capital expenditure plans when it announces its 2023
hydrocarbons expansion. full-year results in March, but analysts are penciling in a $5 billion cut
to Aramco’s oil capex this year.

The intention is to use some of this capital to help the power sector
move away from oil and towards gas feedstock. Yet it will take some
The hydrocarbons sector should time to wind down the oil program and make the transition. Given
return to growth in 2025. this, and the difficulties in supplying Europe, hydrocarbons GDP
seems likely to slip by around 1.8 percent in 2024, before regaining
upward momentum in 2025 when we expect it to grow by almost 8
percent.

Wholesale & Retail, Restaurants & Hotels (21.8 percent of non-

Domestic Trade had another stellar oil GDP) was up by 6.9 percent in the year to Q3 2023, year-on-year,
year with restaurants and an acceleration on 2022 when the sector’s contribution rose by 5.7
hospitality boosted by a further rise percent. The rise was powered by both religious and non-religious
in visitors. tourist growth. Umrah visitors were up by 58 percent on pre-
pandemic (2019) levels to reach 13.5 million. In addition, Umrah
visitors are now able to stay longer in-Kingdom and take advantage
of the growing number of spending opportunities. The number of Hajj
pilgrims also surged, up by 80 percent from 2022.

Meanwhile, the growth in general tourism was striking, with the

Kingdom ranking as the second fastest growing tourism destination
globally. In 2023, the Kingdom saw 27 million visitors from abroad,
with total spending exceeding SR100 billion during the year. As a
result, the authorities were prompted to raise the 2030 target to 150
million visitors (Figure 8).

Elsewhere, full-year consumer spending (POS, e-commerce & ATM

Like many around the world, cash withdrawals) rose 7 percent year-on-year to SR1.3 trillion, up
Saudis are spending more on by 27 percent on pre-pandemic levels. Spending (POS only) on
services than goods. ‘hotels’ and ’restaurants and coffee shops’ rose by 19 percent and 14
percent year-on-year, respectively, as consumers focus more on
services than goods (Figure 9). As such, spending on ‘jewelry’,
’furniture’ and ’electronics’ continued declining compared with the
previous year, though we expect some rebound in furniture as
mortgage demand revives in H2-24.

Looking ahead, we expect to see continued growth in the tourism

sector, with a number of high-end hotels due to be launched around

Figure 8: Tourism targets are revised up for 2030 Figure 9: POS Spending in 2023, by Sector
(year-on-year change)
35
160 30
25
140 20
(Percent)

150 million
120 visitors
15
10
(million visits)

100 5
80 100 million
0
visitors
-5
60 -10
Others

Health
Hotels

Restaurants

Clothings

Jewelry
Misc. goods

Recreation

Furniture
Bldg material
Electronics
Public utlities

Transport
Education
Food & Bev.

Telecom

40
20
0
Previous target Revised target

9
February 2024

The tourism sector should get a the Kingdom, including in Makkah, Alula, Riyadh and the Red Sea.
further fillip this year as a number of In addition, a number of sports and entertainment events taking
hotels are launched and tourism place across the Kingdom should add a helpful tailwind to the
visits continue their upward hospitality sector. Saudi Arabia now has 280,000 hotel rooms, with a
trajectory. pipeline of 250,000.
On the demand side, a further acceleration in visitor numbers (both
religious and non-religious) is expected this year, thanks in part to
intensive marketing efforts. There is some downside risk here
depending on regional geo-political developments, which may be off-
putting to potential (non-religious) visitors from outside the region.
Non-oil Manufacturing (18.1 percent of non-oil GDP) saw a weak
performance, edging up by just 0.5 percent in the year to Q3 2023,
Non-oil manufacturing was held
with Q3 showing a yearly decline of 3.4 percent. The sector has
back by a weak export
been hit by weakness in China’s demand for imported
performance, though domestic
petrochemicals, given that country’s rapid expansion of domestic
industry is in pretty good shape.
capacity (Figure 10). The Index of Industrial Production (IIP)
reflected this weak demand, showing a decline on a yearly basis in
December (Figure 11). Locally, however, growth is still robust and is
likely to have been enhanced by more than 1,000 new industrial
factories starting production in 2023 (worth SR32 billion of
investments), creating some 33,000 new jobs over the same period.

The positive domestic story should remain intact in 2024 with further
additions to the Kingdom’s manufacturing capacity. Specifically, the
Ministry of Industry and Mineral Resources intends to provide SR8.8
billion in facilities to support local exporters in the global market, and
aims to attract up to SR670 million in new investments within the
machinery and equipment sector, in line with Vision 2030 goals to
diversify the economy.

An increase in feedstock prices Less positively, the situation in China is unlikely to improve given
represents another headwind for that its own petrochemicals production capacity is pretty much full.
Saudi petrochemicals firms to There should be some offset from Indian demand, which is very
navigate. strong, though Saudi producers have the added headwind of higher
feedstock (and diesel) costs. These price rises, announced by
Aramco in early January, are set to add around 3 percent on
average to Saudi producers’ cost of sales.

The Transport, Storage & Communication sector (11.8 percent of

non-oil GDP) saw a robust 7.7 percent gain in the year to Q3 2023.
Growth in the sector was substantially supported by the upward
trend in tourism (see above) but also by a notable rise in railway
traffic. Saudi Arabia Railways carried more than 11 million
passengers during 2023, up 55 percent from 2022 (including almost

Figure 10: Non-oil Exports Figure 11: IIP Manufacturing

(year-on-year change) (index)
Petrochemicals 170
Plastics and rubber
100 160
75 150
50
(percent)

140
25 130
0
120
-25
110
-50
-75 100
Nov-19 Nov-20 Nov-21 Nov-22 Nov-23 Dec-20 Dec-21 Dec-22 Dec-23

10
February 2024

two million pilgrims through Jeddah, Makkah and Madinah - up from

Transport had another strong year, 1.35 million in 2022). Cargo transportation also saw a robust gain
pulled along by the growth of during the year, reflecting the healthy domestic trade environment.
tourism and wholesale trade. Added to this, the year saw the trial license of the first hydrogen train
in the Middle East, an agreement to launch two logistic hubs in
Dammam and Jeddah, and the launch of “Riyadh Air” as the latest
national airline brand.

Meanwhile, the consolidated profitability of listed telecom companies

Telecom firms saw profits rise by rose 26 percent year-on-year in the year to Q3 2023 (latest available
26 percent, and with infrastructure data), reflecting growth in both new services and subscribers, which
roll-out ongoing the sector should helped push the market size of the telecom and technology sector
continue to prosper. up by 6 percent. The sector also benefitted from digitalization, with e
-commerce transactions growing by 28 percent in full-year 2023, and
the number of Fintech companies listed on Tadawul reaching 18,
with a market cap of SR3 billion at end year.

Various transport projects are expected to come on line this year,

Giga-projects are also driving which should translate into sizable growth in this segment. This
transport and logistics includes road projects, logistic hubs and airport terminals. Giga-
developments. project development should also deliver civil works in NEOM,
Qiddiya and King Salman Park in Riyadh. Sector plans also include
launching more logistic centers, to reach 23 (out of 59 planned for
2030). Finally, a further sharp rise in Umrah and Hajj pilgrims is
anticipated. For example, some 2 million Hajj visitors are expected
this year, a large number of whom will come from outside the
Kingdom. We think that the religious cohort will be largely impervious
to geo-political tensions (Figure 12).

Banks performed well in 2023 with Finance, Insurance, and Business Services (11.2 percent of non
ROA and ROE increasing. -oil GDP) saw decent growth of 5.2 percent in the year to Q3 2023.
Bank lending to the private sector softened to 10 percent growth in
2023 from 13 percent in 2022 as deposit growth slowed (Figure 13;
Box 2). Yet net interest margins were supported by higher lending
rates, which outweighed an increase in the cost of deposits (the
Saudi deposit base still has a large non-interest bearing element to
it). This was one reason why both return-on-assets and return-on-
equity edged up in the year to Q3-23, reaching 2.2 percent and 12.9
percent, respectively.

It was also a good year for IPOs. Elsewhere, the capital markets saw a total of 35 Initial Public
Offerings (IPOs) during the year (Figure 14). The sector’s growth
was also helped by a rise in the number of privately-insured persons,
up by a total of 700,000 beneficiaries (or 6 percent) during 2023,
with a rise in both Saudi and non-Saudi beneficiaries.

Figure 12: Hajj Pilgrims Figure 13: Bank Lending to the Private Sector

3.0 Bank credit to private sector

year-on-year change, RHS
2.5 2600 20
18
2400
(million pilgrims)

2.0 16
2200
(SR billion)

14
(percent)

1.5
2000 12
1.0 10
1800 8
0.5 1600 6
4
0.0 1400
2
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024F

1200 0
Dec-19 Dec-20 Dec-21 Dec-22 Dec-23

11
February 2024

We expect the Finance, Insurance, and Business services sector to

see higher rates of growth in 2024 in line with lower interest rates in
H2, which should spur mortgage demand (albeit with some funding
constraints—see below and Box 2). More generally, the expansion of
the non-oil economy and the ongoing influx of expatriates should
provide a firm underpinning to the sector.

Real estate had a quiet year, held Real Estate Activities (11.2 percent of non-oil GDP) grew at a
back by weak mortgage creation, modest 1.2 percent pace in the year to Q3 2023, a slowdown from
which in turn weighed on the 1.4 and 6.6 percent recorded in the same period of 2022 and
developers’ confidence. Again, 2021, respectively. Growth continued in various housing projects
this should change in H2 as under the Ministry of Housing’s (MoH’s) Sakani program, but new
interest rates decline. residential mortgages provided by banks and finance companies
declined by 35 percent in volume terms last year, with the latest
SAMA data showing that new mortgage lending totaled SR80 billion,
down from SR123 billion in 2022 (Figure 15).

For 2024, the picture is somewhat brighter—at least in H2—as lower

interest rates stimulate mortgage demand. However, with private
sector credit-to-deposits running at around 100 percent, banks will
need to be creative in how they meet this demand. One under-
utilized option would be to boost securitization by offloading some of
their current stock of mortgages to the state-owned Saudi Real
Estate Refinancing Company (SRC).

Official policies are supporting the Meanwhile, we see the MoH’s Sakani program continuing to support
sector substantially. the sector. The ministry has plans to provide 100,000 housing units
to families, with 50,000 units in partnership with local real estate
developers, as the MOH strives to raise the home-ownership ratio to
70 percent by 2030.

Construction is benefitting from an The Construction sector (9.2 percent of non-oil GDP) saw another
extended tailwind of giga-project solid rate of growth in the year to Q3 2023, though at 3.9 percent this
activity. Total spending on projects was markedly softer than the 8.8 percent registered in the same
will be some $79 billion this year, period of 2022, likely reflecting a growing scarcity of key inputs (see
according to MEED. below). As has been the case for the past few years, much of this
growth came from project spending, primarily giga-projects. MEED
estimates the value of total projects either completed or in execution
in 2023 at $60 billion, up from $44 billion in 2022.

For 2024 and beyond, growth in this sector will be mainly supported
by the PIF’s giga-projects: Neom, Red Sea, Roshn, Qiddiya and
Diriyah, all of which saw varying rates of progress during 2023.
Moreover, the sector will continue to benefit from the rise in
government capital expenditure, which we see rising to SR193 billion
in 2024 from SR186 billion in 2023 and SR143 billion in 2022. As
Figure 14: The capital markets saw a total of 35 Figure 15: New mortgage loans were down in
IPOs in 2023, with 7 of them in the main market 2023 by 35 percent year-on-year
IPO Mortgage amount, RHS
Number of offerings (RHS) Year on year growth
200 180
40 20
160
35
(number of offerings)

150 140
(SR billion)
(SR billion)

30 15
25 120
(percent)

100
20 10 100
15 80
50
10 5 60
5 0 40
0 0 20
-50 0
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

2018 2019 2020 2021 2022 2023

12
February 2024

highlighted in the recent budget statement, the annual rise in capex

stems from the government’s plan to move forward with spending on
mega-projects, growing sectors such as tourism, manufacturing and
mining, and other infrastructure projects around the Kingdom. MEED
forecasts total spending on projects in 2024 at $79 billion.

The main challenge is the cost and/or scarcity of inputs. The sector
However, costs are rising sharply added 148,000 workers in the year to Q3 2023 on a net basis, but
and overruns seem likely. this was down from 400,000 added in full-year 2022 (Figure 16).
India, the traditional source of much construction manpower, has its
own vibrant project market, and Saudi wages will need to rise further
to tempt these workers across the Arabian Sea. Meanwhile, copper,
rebar and glass are in high demand. Even without the turmoil in the
Red Sea the sector would be fully stretched and cost overruns (and
possibly some project timeline extensions) are inevitable.

Community Services is often Community, Social & Personal Services (7.3 percent of non-oil
overlooked as a growth driver, but GDP) rose by an eye-catching 12.6 percent in the year to Q3 2023,
it had an outstanding 2023 and will year-on-year, up from just 1.7 percent in the same period of 2022.
continue to benefit from the rollout This sector includes education, healthcare, arts, entertainment, and
of cultural and sports sports, all of which have benefitted from various Vision 2030-related
infrastructure. initiatives (Figure 17).

The sector is expected to see further solid growth in 2024 as the

Quality of Life (QoL) VRP continues to plan for various events and
activities. In addition, the Ministry of Health plans to launch a number
of hospitals with a total capacity of 1,100 beds, and the Ministry of
Education aims to further digitize education channels.

Agriculture, too, is seeing a Agriculture (6 percent of non-oil GDP) rose by 3.7 percent in the
renaissance as the government year-to-Q3 2023, year-on-year. Last year the sector benefitted from
intensifies efforts to boost food the ongoing push to secure self-sufficiency in various foods,
self-sufficiency. including providing more than 10 million tons of 12 basic food
products locally. For 2024, the target is 11 million tons of locally-
sourced food products.

Electricity, Gas and Water saw Electricity, Gas, and Water (2.6 percent of non-oil GDP) saw a 3.6
modest growth in 2023 but this percent gain in the year to Q3 2023, as the sector saw the rollout of
sector has strong medium-term SR14 billion of water projects. For 2024, growth in this segment will
tailwinds. be spurred by the ongoing expansion of water desalination capacity.
The sector will also benefit from projects worth SR14 billion coming
on line, including solar initiatives, electricity generation and
transmission. Water desalination will grow in importance as Riyadh
(and other conurbations) expand. But it is probably gas supply that
has the best outlook given its role as an industrial feedstock and its
importance to the energy transition.

Figure 16: Construction Sector Employment Figure 17: Healthcare services are expanding with
a rising role for the private sector
2.7 100%
2.6 90%
2.5 80%
2.4
70%
2.3
(million)

2.2 60%
2.1 50% Public sector
2.0 40% Private sector
1.9 30%
1.8 20%
Q2 2020

Q1 2022

Q1 2023
Q3 2019
Q4 2019
Q1 2020

Q3 2020
Q4 2020
Q1 2021
Q2 2021
Q3 2021
Q4 2021

Q2 2022
Q3 2022
Q4 2022

Q2 2023
Q3 2023

10%
0%
2023 2030 target

13
February 2024

Non-oil Mining and Quarrying (0.8 percent of non-oil GDP) grew

by 6 percent in the period to Q3 2023, year-on-year, reflecting the
Non-oil Mining currently ramping up of exploration for base metals in particular. Foreign
contributes very little to GDP, but appetite for investment in the sector is growing: in 2024, the Ministry
the potential is formidable. of Industry and Mineral Resources (MIM) is planning to issue 30 new
mining permits and to auction 10 new mining exploration licenses. In
addition, the MIM has recently revised up the Kingdom’s mineral
wealth from SR4.9 trillion to SR9.4 trillion, as a result of the past five
years’ intensive surveying and exploration efforts.

Fiscal Performance
The fiscal position and outlook is comfortable, though this
The fiscal position fell back into characterization depends on the inclusion of “performance-related”
deficit last year, dragged down by dividends from Aramco in the central government’s revenue. These
weaker oil earnings. However, are based on Aramco’s free cash flow and are likely to be worth
non-oil revenue was buoyed by a SR150 billion a year.
surge in income tax on foreign
firms. Excluding this revenue, the government recorded a deficit of around
SR156 billion, or 3.9 percent of GDP, in 2023. This reflected a 21
percent fall in oil revenue as prices sagged and production was
throttled back. This saw oil revenue fall to SR680 billion, around
SR177 billion less than in 2022. Non-oil revenue did much better,
rising by SR47 billion to SR458 billion. The most notable gain was a
58 percent surge in income tax on foreign firms, as the Regional
Headquarter (RHQ) program began to yield results.
Spending grew by 11 percent, with substantial gains in all the major
Spending rose by 11 percent last
year, with outlays on wages & items: wages & salaries (4.7 percent), procurement costs (18
salaries posting the biggest percent), social benefits (23 percent), and capex (a whopping 30
nominal gain. Still, as a percentage percent). None of these increases is especially surprising given the
of GDP this item fell slightly economic development context, and it is notable that spending on
compared with 2022. wages & salaries—far and away the biggest single line item—was
worth 13 percent of GDP last year, down from 15 percent in 2018.
Nevertheless, the ratio is still extremely large and remains a key
fiscal vulnerability.
Aramco began paying the government performance dividends from
H2-23 onwards, and thus transferred half of the SR150 billion annual
amount (the government included this in its total oil revenue). This
reduced the deficit by just under half to 2.1 percent of GDP.
Financing was straightforward through debt issuance, both local and
external.

Figure 18: We see government spending growth Figure 19: The budgetary and debt outlook is
of around 5.2 percent in 2024 comfortable

1,500 Budget balance Public debt, RHS

6 0
1,400 4
2 5
(percent of GDP)
(SR billion)

(percent of GDP)

1,300 0 10
1,200 -2
-4 15
1,100 -6
-8 20
1,000 -10
-12 25
900 -14 30
-16
800 -18 35
2015 2017 2019 2021 2023E 2025F 2014 2016 2018 2020 2022 2024F
Includes Aramco “performance related” dividends.

14
February 2024

Including the performance-related The 2024 outlook is weighed down by quite a weak oil revenue
dividends from Aramco, the 2023 projection. We now expect oil production to be held more or less at
deficit was around 2 percent of current levels until Q4-24, and with prices falling to an average of
GDP. $81 pb (Brent), oil revenue—excluding performance dividends—is
set to fall by a further 14 percent this year. Elsewhere, VAT revenue
should see a similar gain to last year (around 4 percent) while the tax
Oil revenue is expected to fall again yield from foreign firms should also rise as more companies relocate
in 2024, but non-oil revenue should to the Kingdom. Customs revenue should see a boost from higher
see a decent rise. costs per ship, but this will be offset by delays to arrivals. These
gains should go some way to offsetting the oil revenue loss, but not
completely and we expect overall revenue to slip by around 5
percent this year (excluding performance dividends).
Spending growth is expected to remain quite strong at around 5.2
percent (Figure 18). Wages and salaries will continue to grow in line
with the bid to deliver much of the Vision 2030 agenda. True, the PIF
Spending growth could be higher and its subsidiary firms are largely responsible for the giga-projects,
than our 5.2 percent projection but the central government must still provide much auxiliary
given higher project costs. infrastructure and meet the varied needs of an expanding population.
All of this requires additional manpower. Capex itself is expected to
rise, but there are question-marks about the rate of increase given
the shortage of inputs stemming from Red Sea supply dislocations
along with a generally very tight project market. Projects could be
delayed, but those that go ahead are likely to face cost overruns.
The same dynamic applies to purchases of goods and services,
since most of these are imported. For this reason, our spending
growth forecast carries considerable upside risk.
If Aramco’s performance dividend did not exist, then the projected
deficit would be a sizeable 6.3 percent of GDP. But including the
dividend reduces the deficit to 2.4 percent of GDP (Figure 19). In
fact, there is some upside here: Aramco’s announcement that it will
be ending its oil capacity expansion project could potentially boost
free cash flow and hence the government’s dividend. However, it
seems more likely that the spending will be diverted towards gas and
renewables projects.
The fiscal deficit should narrow to The 2025 fiscal outlook is somewhat better. We see oil prices and
around 1 percent of GDP in 2025 production rising, which should push up the government’s oil
once performance dividends are revenue by around 14 percent. Trends in non-oil revenue should
included. remain intact, with further gains in VAT driven by more expatriate
arrivals (expatriates tend to save more than consume, but the
volume of additional workers will have an impact). Spending should
see a 5.4 percent gain, but with further upside risk as various interim
deadlines come due. There should be some relief on costs,
assuming calm is restored to the Red Sea, and procurement
spending growth should ease a little.
This should mean a deficit of around 4.6 percent of GDP, but when
the Aramco special dividend is added this is reduced to 1 percent of
GDP. In both years the deficits will be financed comfortably by
further debt issuance (foreign and local appetite for Saudi public
sector debt is very strong).

15
February 2024

Balance of Payments
The current account is likely to Saudi Arabia’s current account position is likely to have recorded a
have posted another surplus in comfortable surplus in 2023. However, a sizeable deficit on the
2023, but outflows through the financial account, along with outflows through net errors and
financial account meant that omissions, meant that reserve assets fell during the year.
reserve assets fell.
The current account surplus was dragged lower to an estimated 2.8
percent of GDP from 13.6 percent of GDP in 2022. Unsurprisingly, a
26 percent slump in oil earnings was the main reason, though
waning Chinese demand for Saudi petrochemicals also played a
role. Meanwhile, import spending surged by an estimated 14
percent, with machinery, electrical equipment, and transport
The current account surplus was a equipment—most of it related to giga-projects—recording sharp
lot smaller than in 2022, pulled gains. On the invisibles side, workers’ remittances were
down by a fall in oil earnings and unexpectedly low given the influx of expatriates. It might be that
another sharp gain in import some expatriates decided to take advantage of the high savings
spending. rates on offer in the Kingdom rather than sending money home. A
more meaningful support to the invisibles balance came from
tourism, with earnings growing by more than 50 percent according to
our estimates.

Is the narrowing current account surplus cause for concern? Not in

The fact that an Emerging Market our view. Indeed, the Kingdom has run sizeable deficits in the past
in the midst of such a capital-heavy with only modest pressure on the exchange rate peg. From a
transformation is recording a broader perspective it is unusual for an Emerging Market embarking
current account surplus at all is on such a capital-heavy transformation to be running any kind of
unusual. This is testament to Saudi surplus, and that of course is testament to the Kingdom’s oil wealth.
Arabia’s oil wealth. What might be of concern to the authorities are elements of the
current account, such as the downward drift in non-oil exports and
the dramatic rise in import spending (up 16 percent a year over the
past three years). But, equally, they will be pleased with the gains in
tourism income which have pushed the tourism balance decisively
into surplus (Figure 20).

This year the current account picture is likely to deteriorate, though

the overall balance should remain in surplus. This stems from our
weaker oil price assumption coupled with a further decline in
projected crude output. Import demand should remain strong and
prices of key construction inputs are likely to rise. We expect the
invisibles deficit to narrow this year, helped by continued strong
growth in tourism earnings (regional geopolitical stresses are unlikely
to deter the core religious cohort from visiting the Kingdom, though
they might have some impact on potential arrivals from Europe).
Income receipts from overseas equity investments should gain,

Figure 20: Tourism Receipts Figure 21: Balance of Payments

80 200 Current account balance

70 Financial account balance
150 Change in official reserves
60
100
($ billion)

50
($ billion)

40 50
30 0
20
10 -50
0 -100
2018

2019

2020

2021

2022

2023E

2024F

2025F

-150
2020 2021 2022 2023E 2024F 2025F

16
February 2024

We see further firm import growth especially after the Federal Reserve begins to cut interest rates,
this year (with upside risk) and with which will also soften debt service outflows. Overall, we see the
oil earnings struggling, the trade current account surplus easing to 2 percent of GDP in 2024.
surplus is set to narrow.
The situation should improve in 2025 as oil prices and production
rise. This should more than offset further double-digit percentage
Income from tourism and growth in import spending, allowing the trade surplus to grow. We
investments abroad should provide expect tourism earnings to be pushing $75 billion by 2025 (6 percent
a partial offset. of forecast GDP)—a totem of success in the diversification effort. All
told, we see the current account surplus rebounding to around 5
percent of GDP (Figure 21).

The balance of payments position Flows on the rest of the balance of payments are difficult to predict,
should improve in 2025 thanks though with a smaller current account surplus one is likely to see
largely to a revival in oil revenue and weaker outflows. Data reclassification is likely to mean an upward
further gains in tourism earnings. shift in recorded foreign direct inflows, though the impact of the RHQ
program should also become apparent. Portfolio inflows will mainly
be attracted to debt, given a lack of liquidity in the Tadawul. Private
Following a further dip this year, outflows, which have at times been very large, should subside as
reserve assets should recover to domestic opportunities multiply. All told, we expect SAMA’s reserve
some 37 percent of GDP by assets to continue to ease this year, finishing 2024 at around $428
end-2025. billion (still a very healthy 39 percent of GDP). A nominal gain is in
prospect for 2025, though as a share of GDP reserve assets will
ease to 37 percent. This equates to 19 months of import cover.

Monetary and Financial Developments

By most measures deposit growth Growth in lending and broad money have moved in tandem in recent
was strong in 2023. Yet it slowed months. Although percentage growth rates are now below double
during the course of the year, digits (year-on-year), they are still robust by historical and peer
obliging banks to cool lending to the country standards (Figure 22).
private sector.
In 2023 the broad money supply measure (M3) increased by just
under 8 percent. This reflects a 32 percent surge in time and savings
deposits, attracted by historically high interest rates. This was
There was also some cyclical enough to offset a 1.2 percent fall in demand deposits, which also
slowdown in credit as higher interest meant that the share of demand deposits in M3 fell from 60 percent
rates ate into mortgage demand.
in 2022 to 49 percent by the end of 2023.
Meanwhile, bank lending to the private sector eased to 9.7 percent
growth in 2023, the weakest since 2019 (Figure 23). The
comparatively soft rate (by historical, not peer country standards)
reflects both high lending rates and banks’ concern to keep lending
growth in line with deposit growth (Box 2).

Figure 22: Credit to Private Sector vs Deposits Figure 23: Bank Lending by Sector
(year-on-year change) (year-on-year change)

Credit to private sector Credit to public sector enterprises

Total deposits 35 Credit to private sector
20 30
16 25
20
(percent)

12
percent

15
8
10
4 5
0 0
Dec-18

Dec-19

Dec-20

Dec-21

Dec-22

Dec-23

-4
2016 2017 2018 2019 2020 2021 2022 2023

17
February 2024

Credit to the public sector (excluding government bonds) grew by 15

percent in 2023. This is still a small proportion of total bank lending
Credit to the public sector grew by (around 6 percent) though it has been increasing, particularly in
15 percent, but it remains a small recent years as Vision 2030 projects have gathered pace. Note,
percentage of overall bank lending. however, that PIF-related investment is classified as “private” and
credit to these entities is not captured by “public sector” credit.
Meanwhile, holdings of longer-term government securities have also
increased. These are highly liquid instruments that are easy to repo
in times of tightened liquidity.
The growth of net new private credit continues to vary widely by
sector (Figure 24). Last year, high interest rates weighed heavily on
Private sector lending varies
sharply by segment. Mortgage demand for mortgages, with total new contracts slumping to 103,000
lending continued to fall last year, from 154,000 in 2022 (which itself was a weak year). Weak
but credit to the construction sector mortgage demand rippled out to real estate activity and growth in
picked up. credit to this sector softened notably. However, credit to
‘construction’ picked up by 11 percent, reflecting robust giga-project
activity. Credit to ‘manufacturing’ was almost unchanged, as worries
about Chinese demand for Saudi petrochemicals weighed on
bankers’ minds. Elsewhere, ‘mining and quarrying’ saw 9 percent
growth over the year, albeit from a low base. This reflects
accelerating exploration activity for critical minerals and metals,
along with some credit facilities (generally for trade) provided to
Aramco and associated firms.
Meanwhile, the share of Small & Medium Enterprise (SME) loans in
SME lending saw its share total credit provided by banks and finance companies stood at 8.7
increase. percent at the end of Q3 2023. This was higher than the 8.1 percent
registered in Q4 2022, thanks in part to a significant rise in the share
of lending to micro-sized enterprises (from 3 percent of lending pre-
pandemic to 9 percent in Q3 2023).
Financial soundness indicators
Risk metrics are sound, with Data on risk metrics (up to Q3 2023) showed that non-performing
particularly strong provisions for loans (NPLs) as a share of total loans continued to improve, easing
liquidity risk.
to 1.6 percent of total gross loans, from 1.8 percent at the end of
2022 and 2.2 percent at the end of 2020. Other ratios are also
However, system-wide liquidity is comfortable: for example, liquid assets-to-total assets stood at 21.6
still tight, and a key spread has percent at end-Q3. While this represents a fall from a year earlier, it
widened in recent months. still signifies a banking sector with good access to liquid assets (for
example, the US ratio is around 16 percent). That said, liquidity
strains in the system as a whole are still evident: the spread of

Figure 24: New Bank Loans by Sector, 2023 Figure 25: Saibor vs USD Libor

50 SAIBOR 3M USD LIBOR 3M

7
40
6
(SR billion)

30
20 5
10 4
0
-10 3
Manufacturing
Admin

2
Utilities

Wholesale & Ret.

IT
Finance

Tech. Activities
Mining
Transport

Education

Agriculture
Real Estate

Health & Social

Construction

Accom. & Food

Other

1
0
Apr-23

Feb-24
Nov-22
Jan-22

Jun-22

Sep-23

18
 February 2024

Saibor over USD Libor (a key gauge of liquidity) has widened again
in recent months (Figure 25). Meanwhile, capital adequacy ratios are
also very conservative, with a sector average of 18 percent of Tier 1
capital to risk-weighted assets.

Box 2: Saudi Banks’ Funding Challenges

In recent years, loan growth has Saudi banks have historically been highly liquid, well-capitalized and
outstripped deposit growth, with profitable. This is still broadly the case, but while Vision 2030 has
the loan-deposit ratio in excess of opened up new lending opportunities, funding challenges are
100. becoming more pressing.
This is clear from the loan-deposit ratio (LDR), which measures
With deposit growth softening, lending to the private sector against available deposits*. In recent
banks have been obliged to rein in years, buoyant economic growth has propelled brisk credit demand
lending growth in recent quarters. and even though deposits have grown, they have not kept pace with
lending. Consequently, the LDR finished 2023 above 100, which is
an uncomfortable metric for risk managers. With deposit growth now
softening, pulling this ratio back to acceptable levels will mean
putting the brakes on lending growth—unless other funding sources
can be captured.
To meet the demands of the local
economy, banks have been The latter is happening. Many local banks have diversified their
looking for other sources of funding sources and issued Tier 1 and Tier 2 capital and other debt
funding, such as capital issuance. instruments (including senior unsecured and subordinated debt). In
2022 they issued SR28.4 billion of Additional Tier I (AT1) and Tier 2
capital, while some banks have also established Euro Medium Term
Notes (EMTNs—dollar notes issued outside of the US) that they can
tap in case of need. Given this, it is no surprise that Saudi banks’
liabilities with foreign counterparts have increased by around 34
percent or $16 billion in the past couple of years.
But more will need to be done,
especially given the likely revival in These efforts are helpful, but, as Moody’s points out, they have
mortgage demand. increased funding costs and are unlikely to be sufficient.
With mortgage demand set for a revival in H2, banks will need to
keep diversifying their sources of funding. Greater use of the state-
owned Saudi Real Estate Refinancing Company would help: banks
have the option of selling on existing mortgages to this agency (with
fees) to free up space on their books. However, for the moment
Banks cannot be expected to banks seem more inclined to hold on to mortgages given the high
shoulder the burden of Vision 2030 margins that they command.
financing, but they will need to
keep diversifying their funding The banking system’s deposit base is only around $660 billion and
sources in order to support the no-one expects banks to generate all the funds for Vision 2030.
private sector. Foreign equity investments and public sector debt will have to play a
role in delivering this agenda. But as the economy expands, banks
are struggling to keep pace with even day-to-day corporate and
retail demand. Thus, further capital issues and other sources of
(foreign) wholesale funding will be necessary.
*This is not the SAMA-mandated LDR, which allows banks to include other debt
liabilities in the denominator.

Easing inflation
Since H2 2023, growth in consumer prices has slowed, with end-
year inflation easing to 1.5 percent, the weakest reading in almost
two years. ‘Food and beverages’ was the primary area of softening,
Consumer price inflation remains reflecting, in the main, further declines in global food prices (the
subdued. FAO’s main food price index declined by around 10 percent in 2023).
The main upward price pressure has come from ‘housing and
utilities’, with sub-group ‘rentals for housing’ continuing to show

19
February 2024

Rent pressures are the main robust rises amid high demand, although new data suggest that
source of inflation. These should rents probably peaked in recent months (Figure 26). Strong rental
soften somewhat as more Saudi demand is a result of high mortgage rates, which have encouraged
nationals are tempted back to the many Saudis to rent rather than buy. Firm expatriate demand for
buying market in H2. rentals is also a factor.

This year food and beverages prices should continue to ease in line
with global trends. As borrowing rates fall in H2 and housing sales
increase again, rental growth should start to soften. Nevertheless,
However, expatriate demand is rents seem unlikely to fall (at least in the main conurbations) given
likely to remain firm, keeping a strong rates of non-oil GDP growth, which will continue to lure many
floor under rents. expatriates to the Kingdom.

Stronger demand for home ownership in H2 should create positive

spillovers for related sectors such as ’furniture’ and ’electronics’
which have been restrained by lower housing demand in 2023. At
the same time, we expect sectors such as ‘transport’ and ‘hotels and
restaurants’ to see gathering demand as the tourist offering expands
and varies.

The recent upward adjustment to feedstock and diesel fuel prices

initiated in January 2024 could have some spill-overs to retail prices,
as could the impact of Red Sea disruption. It is notable that the latest
Risk is tilted towards the upside PMI (for January) shows non-oil firms raising output prices in
and will depend on the degree to response to rising cost pressures (see above).
which local firms absorb higher
costs. On balance, the above trends have led us to keep our inflation
forecasts at an average of 2 percent in 2024, with a slight increase to
2.1 percent for 2025 (Figure 27). Risks are to the upside, however,
and stem from the degree to which consumer-facing firms choose to
pass on higher costs.

Figure 26: Rentals for Housing Figure 27: Consumer price inflation is expected to
(year-on-year change) remain manageable
15 4

10 3
2
5
(percent)

1
(percent)

0
0
-5
-1
-10 -2
-15 -3
2018 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2024F 2025F

20
February 2024

The Outlook for 2025

Next year is set to be a better one for the global economy. In many
Global economic activity should be parts of the world, high inflation and the subsequent surge in interest
on an upswing in 2025… rates have taken a heavy toll on investment and consumption.
Inflation is now falling in most countries, and interest rate cuts are on
the way. The full impact of this should be evident in 2025. This does
not mean there will not be challenges—clearly, geo-political risk is
rising and this could keep consumers and businesses on edge—but
from a macro-financial perspective the world should be more stable
and predictable. Moreover, the cyclical rebound should be
pronounced given the degree of tightening to be unwound.

Oil prices should also start to climb again in 2025 as industrial

activity gathers pace following a tough couple of years. Clearly, the
...which will boost oil prices. energy transition is not going away, but there is a realization that oil
demand is not about to “fall off a cliff”: electric vehicle take-up is still
patchy and the benefits of transitioning to (generally more expensive)
renewable energy inputs are still not compelling for many firms.

Higher oil prices will obviously support the budget and broader
confidence in what is likely to be an important year for the Kingdom,
with many flagship Vision 2030 projects due to come on line. The
two stand-out successes of the V2030 program so far have been
Next year will be an important one female labor participation and tourism growth. Both of these
in Saudi Arabia’s structural dynamics have much further to run and will underpin consumption in
transformation. 2025 and beyond. Giga-project delivery will keep investment growth
strong, while more routine investment will also be ramped up as the
Kingdom’s population continues to expand. We see non-oil GDP
growth at some 5.2 percent in 2025, though this could prove
conservative if tourism maintains its upward trajectory. Tourism
represents genuine diversification away from hydrocarbons, as does
wind and solar energy, which is also likely to be an increasingly
important medium-term growth driver.

Oil prices are a risk to the outlook, but a fading one we think. Of
course, a downward lurch in prices (if sustained) would be a blow to
confidence and central government spending, but we are not
Risks are largely on the supply anticipating this, and in any case the PIF and NDF have strong and
side… comparatively diversified balance sheets. A bigger risk is project
costs. These have surged in recent weeks given dislocations in
global shipping, but they were rising even before the Red Sea
turmoil, reflecting a pretty frenetic pace of project activity which has
led to bottlenecks in the supply of key inputs, including labor.
Shortages should eventually be overcome by market forces, but this
will entail higher costs. These in turn could lead to project delays or
reappraisals.

A further risk is funding. The banking sector is stretched and will be

...including a potential shortage of more so if, as we expect, mortgage demand takes off again in H2 of
capital. this year. We think debt will have to play a key role in the short– to
medium-term. The PIF has plenty of scope to extend its leverage, as
does the central government. Foreign equity will likely play a much
Still, foreign equity inflows should bigger role once giga-projects are up and running and “proof of
gain traction once key V2030 concept” has been established. We also see a greater role for public
projects are up and running. sector guarantees as a way of underpinning private sector
confidence.

21
 February 2024

Key Data

2017 2018 2019 2020 2021 2022 2023E 2024F 2025F

Nominal GDP
(SR billion) 2,681 3,175 3,145 2,754 3,257 4,156 3,831 3,891 4,179
($ billion) 715 847 839 734 869 1,108 1,022 1,038 1,114
(% change) 7.4 18.4 -0.9 -12.4 18.3 27.6 -7.8 1.5 7.4

Real GDP % change

Oil -3.1 2.3 -3.3 -6.7 0.2 15.4 -9.2 -1.8 7.9
Non-oil activities 3.0 -2.4 4.1 -3.7 8.1 5.5 4.6 5.1 5.2
Government activities 0.3 3.9 1.7 -0.6 1.1 4.6 2.1 2.3 2.5
Total -0.1 2.8 0.8 -4.3 4.3 8.7 -0.9 2.3 5.8

Oil indicators average

Brent ($/b) 54 71 66 42 71 104 84 81 86
Production (million b/d) 10.0 10.3 9.8 9.2 9.1 10.6 9.6 9.4 10.2

Budgetary indicators SR billion

Government revenue 692 906 926 782 965 1,268 1212 1266 1391
Government expenditure 930 1,079 1,059 1,076 1,039 1,164 1293 1361 1435
Budget balance -238 -173 -133 -294 -74 104 -81 -95 -44
(% GDP) -8.9 -5.5 -4.2 -10.7 -2.3 2.5 -2.1 -2.4 -1.0
Gross public debt 443 560 678 854 938 990 1050 1115 1178
(% GDP) 16.5 17.6 21.6 31.0 28.8 23.8 27.4 28.7 28.2

Monetary indicators average

Inflation (% change, average) -0.8 2.5 -2.1 3.4 3.1 2.5 2.3 2.0 2.1
SAMA Reverse Repo (%, year end) 1.5 2.5 1.75 0.50 0.50 4.50 5.50 4.50 3.50

External trade indicators $ billion

Oil export revenues 170 232 200 119 202 327 242 226 264
Total export revenues 222 294 262 174 276 411 306 290 331
Imports 135 137 153 138 153 190 216 239 252
Trade balance 87 157 108 36 123 221 90 51 79
Current account balance 10 72 38 -23 44 151 29 21 56
(% GDP) 1.5 8.5 4.6 -3.1 5.1 13.6 2.8 2.0 5.0
Official reserve assets 496 497 500 454 455 460 437 428 447

Social and demographic

indicators
Population (million) 31.0 30.2 30.1 31.6 30.8 32.2 32.9 33.7 34.4
Saudi Unemployment (15+, %) 12.8 12.7 12.0 12.6 11.0 8.0 7.8 7.6 7.5
GDP per capita ($) 23,081 28,036 27,893 23,271 28,215 34,441 31,050 30,832 32,385

Sources: Jadwa Investment forecasts for 2024 and 2025. General Authority for Statistics for GDP, external trade indicators and
demographic indicators, Saudi Central Bank for monetary indicators, Ministry of Finance for budgetary indicators.

22
February 2024

Disclaimer of Liability
Unless otherwise stated, all information contained in this document (the “Publication”)
shall not be reproduced, in whole or in part, without the specific written permission of
Jadwa Investment.

The data contained in this Research is sourced from Reuters, Bloomberg, GaStat,
SAMA, IMF, FocusEconomics, New York Federal Reserve, ’Tadawul, 2024 budget,
CCHI, Vision 2030 VRPs, OPEC, EIA, IEA, IEF, and national statistical sources
unless otherwise stated.

Jadwa Investment makes its best effort to ensure that the content in the Publication is
accurate and up to date at all times. Jadwa Investment makes no warranty,
representation or undertaking whether expressed or implied, nor does it assume any
legal liability, whether direct or indirect, or responsibility for the accuracy,
completeness, or usefulness of any information that contain in the Publication. It is
not the intention of the Publication to be used or deemed as recommendation, option
or advice for any action (s) that may take place in future.

23