December 2023 Macroeconomic Update

Domestic Demand Remains Strong

 Domestic demand in the Kingdom remains very strong, driven by
a booming projects market and firm consumption growth.
Following a comparatively soft patch in Q3, the non-oil economy
is picking up pace again, thanks in part to an acceleration in
central government spending. We expect non-oil GDP growth to
reach 5.1 percent this year and 5.2 percent in 2024 (Figure 1).

 Government spending should remain brisk in 2024 as interim

Vision 2030 targets begin to loom. We see a small pick-up in oil
prices next year, but in any case the government has indicated
that it is comfortable running moderate fiscal deficits in the next
few years (see our 2024 Budget Report). The PIF and NDF are
also likely to provide additional capital to help ensure that V-2030
project targets remain on track.

 Shortages of labor (both skilled and unskilled), higher raw

materials’ costs, and tight liquidity are constraining some project
activity. Labor bottlenecks should be gradually overcome as
wages adjust upwards, and lower interest rates in 2024 should
see liquidity conditions improve somewhat. That said, the sheer
number of projects in execution means increased competition for
scarce inputs, and probable cost overruns.

 OPEC Plus has deepened its production cuts. Output is now

scheduled to be reduced by an aggregate 2.2 million barrels a
day (mbpd) from January 2024, based on June 2023 quotas.
However, this includes Saudi Arabia’s current 1 mbpd cut, which
has been extended to Q1-24. Indeed, we think this cut will be
For comments and queries please contact: extended again to H2-24, meaning that oil GDP is likely to
contract further in 2024.
James Reeve
Chief Economist
 The fiscal position has been buoyed by the addition of
[email protected] “performance-related” dividends from Aramco. These should help
limit the fiscal deficit to around 2 percent of GDP this year, and
see it narrow to less than 1 percent of GDP in 2024.
Nouf N. Alsharif
Managing Director, Research
[email protected] Figure 1: Solid growth expected for non-oil GDP
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Released: December-21-2023, 17:00 UTC+3

December 2023

Global backdrop:

The global economic outlook has improved. In the US the chances of

The global economic outlook has a so-called soft landing have risen, with consumer price inflation now
improved as the US Fed signals down to just over 3 percent even as unemployment remains near
that its tightening cycle is at an historic lows. The Federal Reserve has indicated that it has finished
end. its interest rate hiking cycle, and that rate cuts are likely in 2024. The
main area of global weakness is China, with concerns around
deflation, rising youth unemployment and a stricken property sector
at the forefront of analysts’ minds.

We expect 100 bps of rate cuts in We think the Fed will begin cutting rates from the middle of next year,
2024. with 100 basis points in H2 and a further 100 bps in H1-25. This will
leave the Fed Funds Target Rate at 3.5 percent for the upper bound.
SAMA is set to follow in lockstep, meaning that the Reverse Repo
will also be cut to 3.5 percent by mid-2025. This will be passed on to
Saudi interbank rates, though they will also be influenced by local
credit demand, which is likely to remain very firm.

Meanwhile, oil prices have sagged in the face of weak European

demand, worries about potential Chinese demand and robust non-
Oil prices remain under pressure OPEC supply. A glut of light crude (such as Brent) in all of the major
with fears that OPEC Plus will not demand centers is also weighing on prices. Traders are concerned
be able to reduce output that the recent OPEC Plus announcement of further cuts (to be
significantly. instituted in January) will not amount to very much given that they
are “voluntary” and based off June quotas, which many countries
were already struggling to reach.

In fact, we think OPEC Plus will follow through enough to allow a

We think these fears are overdone significant tightening of balances in Q1-24. We also think US shale
and prices in 2024 should also be output growth is set to slow quite sharply next year and with
supported by weakening US output additional Chinese stimulus set to be deployed, we think oil prices
growth and a general boost to will catch up with the broader rally in commodities prices. Product
commodities as rates are cut. demand—such as for gasoline—also appears healthy and should
receive a further boost from US monetary easing. This in turn will
keep demand for heavy crudes, such as Saudi Arabia’s, in vogue.

All told, we think Brent will rally to reach an average of $89 per barrel
(pb) next year, up from an estimated $84 pb in 2023. Saudi Arabia’s
main export crude should continue to trade at a premium over Brent
of $2-$3 pb. Looking out to 2025, we expect prices to remain firm
given a more supportive demand backdrop. Interest rates should still
be on a downward track in 2025, lending support to global economic
activity. US output should also continue to slow, creating a drag on
non-OPEC output growth. These broad trends should help lift Brent
to an average $90 pb. Yet the overall energy transition will remain
intact, pointing to longer-run oil price weakness.

Oil activities:

Saudi crude production averaged 9.7 million barrels per day (mbpd)
Saudi crude and refinery output is in the year to November, around 8 percent lower than the same
down sharply this year. period last year, with Q3 alone declining by 18 percent year-on-year.
Meanwhile, latest available data from Joint Organizations Data
Initiative (JODI), show that refinery output eased by almost 8 percent
year-on-year in the year to October. This fall is greater than we had
expected, and probably relates to economic weakness in Europe,
which is the Kingdom’s main market for oil products. This has led us
to revise down our estimate of the change in ‘Oil Activities’ GDP to
negative 8.3 percent this year versus negative 7.5 percent previously
(Figure 2).

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December 2023

Looking into 2024, production is expected to fall again. We think the

A further fall in crude output is Kingdom’s production cuts will be rolled over to include the whole of
likely in 2024 as the Kingdom’s H1-24, meaning that production is likely to average 9.4 mbpd, which
cuts are extended. would be 2 percent down on 2023 (Q1-23 output was relatively high).
There is no reason to think that demand for Saudi products will pick
up meaningfully next year, given European economic weakness and
capacity constraints in China. This means that Oil Activities GDP is
set for a further decline, though at negative 1.8 percent it will be
milder than this year’s contraction. Moreover, crude production
should edge up in H2-24 to reach 10.3 mbpd by end-year, with a full-
year gain in 2025 approaching 10 percent as global economic
activity rebounds.

Non-oil activities:

Non-oil GDP growth dipped in Q3, Despite lower oil prices and higher interest rates, the Saudi non-oil
but it should accelerate again in economy performed well in the year to Q3, with GASTAT data
Q4 as government spending picks showing ‘Non-oil Activities’ output rising by an average 4.7 percent,
up. We expect real non-oil GDP year-on-year. This came despite significantly softer activity in Q3,
growth of 5.1 percent this year. when the year-on-year rate eased to 3.5 percent. This is also
captured in our non-oil private sector composite index (Figure 3).

Moreover, the GASTAT data showed a sharp downward revision for

Non-oil Activities GDP in Q2, which is now pegged at 5.3 percent
growth versus 6.1 percent earlier. While we expect growth to pick up
again in Q4—in line with traditionally strong government spending—
the revision to Q2 (and historical data) and the relatively weak
reading for Q3 have led us to cut our overall non-oil GDP growth
estimate for this year to 5.1 percent, from 5.9 percent previously.

Looking into 2024, domestic activity will be boosted by an

Investment growth should acceleration of Vision 2030 project-rollout as 2025 interim Vision
accelerate in 2024 given the push Realization Programs (VRPs) deadlines begin to loom. An added
to deliver interim Vision targets. tailwind comes from Expo 2030, which Saudi Arabia is hosting.
Naturally the Construction sector will be a major beneficiary of the
giga-project push. Against this, housing construction will remain a
drag, with developers unwilling to proceed in an environment of
weak demand. This should begin to change as interest rates fall in
H2-24.

Surging wages and other input The downside of such a vigorous giga-project market is rising cost
costs mean that project cost pressures. These are most visible in surging wages and the rising
overruns are almost inevitable. costs of rebar and copper. Supply should respond to wage and price
signals but project cost overruns seem inevitable.

Figure 2: Oil GDP is expected to see a slight Figure 3: Non-oil growth should accelerate in Q4-
decline in 2024 (year-on-year) 23 thanks to higher government spending
18 Non-oil private sector composite index
15 Non-oil activities GDP growth (yoy, RHS)
12 140 18
9 130 13
6 120
(percent)

3 110 8
0 100 3
-3 90 -2
-6 80
-9 70 -7
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December 2023

While giga-project construction will capture most of the attention, non

-oil activity will be buttressed by a further expansion of Wholesale
The expected decline in interest and Retail Trade, which has seen impressive growth over the past
rates in H2-24 should give a fillip to few years. This sector grew by a real 6.9 percent in the nine months
housing demand. to September, year-on-year. We expect consumer spending to see
higher growth rates in H2 2024, based on our expectations of lower
interest rates (and ongoing female labor force entry). Lower rates will
encourage a shift back towards house purchases (away from rentals)
and associated spending on goods such as ’furniture’, ’electronics’
and ’building materials’. On the supply side, ever more hotels,
restaurants and entertainment options are expected to be rolled out,
catering to both Saudis and another large influx of religious pilgrims
from abroad (Figure 4).

Elsewhere, Non-oil Manufacturing should stage something of a

recovery in 2024. The sector has been hit by weakness in China’s
demand for petrochemicals (Figure 5). More positively, Kingdom-
focused non-oil manufacturing capacity is likely to be augmented
next year.

The central government’s fiscal The central government’s fiscal stance will also remain supportive.
stance has loosened and there The 2024 budget indicates that the government is now prepared to
should be a pick-up in domestic tolerate moderate fiscal deficits, while PIF- and NDF-balance sheet
investment from the PIF and NDF. deployment is likely to be increasingly Saudi-focused. Thus, we see
This indicates that non-oil GDP non-oil GDP growth reaching 5.2 percent in 2024, with a further
growth of at least 5.2 percent is in acceleration in 2025 as the push to meet VRPs intensifies.
prospect next year.
Fiscal:

The central government’s fiscal position is manageable and is likely

to remain so in 2024 with an expanding tax take and modest gains in
oil income supporting overall revenue. The outlook has also been
significantly improved by Aramco’s commitment to pay “performance-
related” dividends, worth an estimated SR150 billion next year.

Government oil revenue has Oil revenue was down 24 percent year-on-year in the nine months to
received a significant boost from end-September, dragged lower by weakening prices and production
Aramco’s commitment to pay cuts. Prices have been volatile in Q4, but are unlikely to exceed Q3
“performance-related dividends”. on average. And with production essentially unchanged, oil revenue
These are worth SR75 billion to the is likely to remain flat in quarter-on-quarter terms. But with the
government this year, and are inclusion of the special dividends (worth SR75 billion this year), oil
scheduled to double in 2024. revenue should come in at around SR731 billion. For 2024, the
outlook balances slightly lower average output with higher prices, but
the inclusion of a full year of special dividends should boost the oil
take to SR792.

Figure 4: Spending on hotels is robust Figure 5: Non-oil exports have struggled

(POS transactions)

14 non-oil exports % change, y/y (RHS)

12 9 70
60
8 50
10
40
($ billion)

(percent)

7
(SR Billion)

8 30
6 20
6 10
5 0
4 -10
4 -20
2 -30
3
0 -40
2 -50
2019 2020 2021 2022 2023-Q3
Sep-19 Sep-20 Sep-21 Sep-22 Sep-23

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December 2023

Non-oil revenue rose 22 percent year-on-year in the year to Q3

2023. All segments within non-oil revenue showed increases, but the
Non-oil revenue should continue to driver was an 18 percent gain from VAT revenue. The upward trend
climb in line with a growing take should continue in 2024 assuming further growth in tourism inflows
from VAT and other taxes. and retail offerings. Additional gains from taxes on foreign firms are
also in prospect as the Regional Head Quarters program takes
effect.

Government expenditure was up 12 percent year-on-year in the year

to Q3 2023, supported by a 21 percent rise in capex as the central
Government spending was up by government pushed on with a number of infrastructure projects. This
12 percent in the first nine months push was the main reason why ‘use of goods and services’ (i.e.
of 2023, year-on-year. procurement) surged by 25 percent. The main element of current
spending remains ’compensation of employees’ (44 percent of total
expenditure), which was up 5 percent, likely driven by the need to
find skilled labor in a tight market.

The Kingdom’s year-to-Q3 2023 fiscal deficit stood at SR43.9 billion.

The MoF recently outlined that the fiscal deficit is expected to hit
SR82 billion (2 percent of GDP) in full-year 2023. This is plausible as
it implies a spike in Q4 spending, which would be in line with
historical trends.

Spending is likely to remain firm The government's budget indicates that spending will fall slightly in
given project cost inflation (among 2024. We doubt this cut will happen, and expect instead a 4 percent
other things). But the deficit should gain in spending, with considerable upside risk given looming project
narrow thanks to a full-year of targets and rising costs. Nevertheless, a full year of Aramco’s
Aramco’s special dividend performance dividends will boost the overall position, allowing a
payments. deficit of just 0.6 percent of GDP.

Current Account:

Our current-account outlook is essentially unaltered. We expect a

surplus of some 2.9 percent of GDP in 2023, supported by the usual
trade surplus and a strong showing from tourism inflows.

Import demand has not been quite as vigorous as we were

anticipating earlier and we have nudged down our full-year spending
Surging tourism receipts have forecast (though it will still mean double-digit percentage growth).
helped to offset a downturn in non- Export earnings are set to be somewhat lower than we were
oil exports. expecting given oil price softness and a weak showing from
petrochemicals exports to China. Some offset is provided by softer-
than-expected workers’ remittances outflows, possibly reflecting the
allure of high savings deposit rates in-Kingdom. The most eye-
catching recent development is tourism inflows, which gained 120
percent in the second quarter, year-on-year, and are expected to
more than double for the year as a whole.
Next year is likely to see the We see another year of strong import growth in 2024 (both capital
smallest trade surplus since 2020. and consumer goods). With oil earnings little more than steady, the
However, invisibles earnings trade surplus is expected to ease to around $62 billion, from $91
should be enough to keep the billion in 2023 and $221 billion in 2022. This would be the smallest
current account in surplus. such surplus since 2020.

Tourism inflow growth might be impacted at the margin by

heightened regional political tensions, though the core religious
pilgrim cohort is likely to remain unfazed. Somewhat weaker savings
rates might see remittances outflows pick up again in H2. All this
means that a current account surplus of around 1.4 percent of GDP
is in prospect.

5
December 2023

Interest rates, liquidity and credit:

Deposit growth has eased below Broad money and lending growth have moved in tandem in recent
10 percent, year-on-year, and months. Percentage growth rates are strong by historical and peer-
banks have slowed the rate of country standards, but they are now below double digits (year-on-
private sector lending accordingly. year) and credit supply is currently struggling to keep up with project
demand.

The broad measure of money supply (M3) was up by almost 9

percent, year-on-year in October. This reflects a striking 39 percent
gain in time & saving deposits—lured by historically high savings
rates. However, the flipside was a 1.4 percent fall in demand
deposits. As such, the share of demand deposits in M3 declined from
60 percent in 2022 to 49 percent in October. As well as higher
savings rates, burgeoning spending opportunities are pressurizing
demand deposits.

Credit to the housing sector has Turning to assets, bank lending to the private sector eased to 9.3
softened appreciably in line with percent growth, year-on-year, in October—the lowest rate since
higher mortgage rates. This should 2020. Banks are keen to ensure that credit growth does not outstrip
begin to reverse next year. deposit growth, though higher interest rates have also weighed on
demand. Likewise, growth in credit to the public sector is on a
downward track (20 percent year-on-year in October from 67 percent
a year earlier). That said, credit to the public sector is still only 5
percent of total bank credit (Figure 6).

Net new private credit growth continues to vary sharply between

sectors. ’Real estate’ has seen weaker growth rates as higher
interest rates have sapped demand for mortgages and softened
construction demand. Credit for ’construction’ as a whole has been
firm given the ramping up of giga-project activity (though project
credit demand is beginning to outstrip supply). Credit for ’wholesale
and retail’ activity has continued to grow robustly given significant
structural tailwinds.

Looking ahead, this trend of cooling private credit growth is likely to

stay in place for H1 2024, given that we expect no cut to SAMA’s
policy rate until H2. From then on we expect a revival in mortgage
activity and a pick-up in purchases of home-related products and
services. Overall, next year’s changing interest rate environment
should see some shift from time & savings back to demand deposits.

Figure 6: Bank Credit to Public and Private Figure 7: Rentals for housing have likely peaked
Sectors (year-on-year change) in recent months (year-on-year change)
bank lending to public sector Rentals for housing (82%)
bank lending to private sector, RHS Water supply & other services (4%)
Electricity, gas, and other fuels (10%)
80 15 15
(percent)
(percent)

60 10
10
(percent)

40 5
5
20 0

0 0 -5
Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Oct-20 Oct-21 Oct-22 Oct-23

6
December 2023

Inflation:

Consumer price growth has been Consumer price growth has been softening since June, with year-on-
weakening. This trend is likely to year inflation easing to just 1.7 percent in November. The main area
stay in place next year as food of weakness was ‘food and beverages’, which dipped into negative
prices continue to soften. territory for the first time in September before edging back up in
October. Transport, too, has seen recent price weakness. Upward
price pressure has come from ‘housing and utilities’, with sub-group
‘rentals for housing’ still showing significant rises amid high demand.
This was despite recent data showing prices have likely peaked
(Figure 7). Brisk rental demand is a by-product of high mortgage
rates, with many Saudis opting to rent rather than buy, for the
moment at least.

In 2024, prices in ‘food and beverages’ are expected to ease further

in line with global trends. Against this, the rental market is likely to
remain tight in H1 2024, given the high interest rate environment and
the ongoing influx of expatriates. Rental growth should begin to ease
in H2 as interest rates come down and house purchases pick up
again. Yet overall rental demand in the Kingdom is likely to remain
firm given the robust levels of non-oil growth anticipated in the
coming years.

Domestic demand should remain Stronger demand for home ownership in H2 2024 should create
firm however, and categories positive spillovers for related sectors such as ‘furniture’, ‘electronics’
associated with home ownership and ‘building material’, all of which have been held in check by weak
should see growth in H2-24. housing demand (Figure 8). At the same time, we expect sectors
such as ‘transport’ and ‘hotels and restaurants’ to see gathering
demand as the tourist offering expands and deepens.

Taken together, the above trends have led us to reduce our inflation
estimate for 2023 from 2.6 to 2.3 percent. For 2024 we now see
average price growth of just 2 percent, from 2.2 percent previously
(Figure 9).

Risks to the forecast:

The near-term risk to the economic outlook centers on any sharp and
Near-term risks center on oil sustained fall in oil prices. The US economy has had to endure an
prices, which could come under almost unprecedented degree of financial tightening over the past
renewed pressure if the US year or so, and this could yet tip it into recession. With the Eurozone
economy was to tip into recession. also struggling, a US recession could have serious implications for
oil prices even as OPEC Plus cuts further.

Figure 8: POS in October Figure 9: Inflation Outlook

(year-on-year change) (year-on-year change)
40 4
30 3
20
(percent)

2
(percent)

10
1
0
0
-10
-1
Clothings

Bldg material
Electronics
Public utlities

Health

Recreation
Hotels

Restaurants

Jewelry

Telecom
Misc. goods
Education

Transport

Furniture
Others
Food & Bev.

-2
-3
2018 2019 2020 2021 2022 2023F 2024F

7
December 2023

That said, we think the Saudi economy is well-placed to deal with

any period of soft prices given the debt “headroom” enjoyed by the
central government, along with the strength of the PIF and NDF’s
balance sheets. We also note from the 2024 budget the MoF’s
willingness to run moderate fiscal deficits. This is a signal that capital
spending will not be shut off in the event of an oil price correction.
The medium-term risk is financing. The banking sector is near the
limits of what it can provide to the private sector (bar the issuance of
additional bonds) while foreign portfolio and direct investment inflows
remain subdued. Again, however, the risk is mitigated by the
comfortable debt metrics that the sovereign (and semi-sovereigns)
enjoy. The appetite to exploit this advantage will presumably rise as
market interest rates begin to come down.

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, Ministry of Finance, Ministry of
Industry and Mineral Resources, General Authority of Statistics, OPEC, SAMA,
Tadawul, Thompson Reuters Datastream, Haver Analytics, Food and Agriculture
Organization of the United Nations (FAO), 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.

8
 December 2023

Key Data

2017 2018 2019 2020 2021 2022 2023E 2024F

Nominal GDP
(SR billion) 2,681 3,175 3,145 2,754 3,257 4,156 3,852 4,032
($ billion) 715 847 839 734 869 1,108 1,027 1,075
(% change) 7.4 18.4 -0.9 -12.4 18.3 27.6 -7.3 4.7

Real GDP (% change)

Oil -3.1 2.3 -3.3 -6.7 0.2 15.4 -8.3 -1.8
Non-oil activities 3.0 -2.4 4.1 -3.7 8.1 5.5 5.1 5.2
Government activities 0.3 3.9 1.7 -0.6 1.1 4.6 2.8 2.7
Total -0.1 2.8 0.8 -4.3 4.3 8.7 -0.5 2.3

Oil indicators (average)

Brent ($/b) 54 71 66 42 71 104 84 89
Production (million b/d) 10.0 10.3 9.8 9.2 9.1 10.6 9.6 9.4

Budgetary indicators (SR billion)

Government revenue 692 906 926 782 965 1,268 1200 1301
Government expenditure 930 1,079 1,059 1,076 1,039 1,164 1275 1326
Budget balance -238 -173 -133 -294 -74 104 -75 -26
(% GDP) -8.9 -5.5 -4.2 -10.7 -2.3 2.5 -2.0 -0.6
Gross public debt 443 560 678 854 938 990 1024 1103
(% GDP) 16.5 17.6 21.6 31.0 28.8 23.8 26.6 27.4

Monetary indicators
Inflation (% change, average) -0.8 2.5 -2.1 3.4 3.1 2.5 2.3 2.0
SAMA Reverse Repo (%, year end) 1.50 2.50 1.75 0.50 0.50 4.50 5.50 4.50

External trade indicators ($ billion)

Oil export revenues 170 232 200 119 202 327 244 245
Total export revenues 222 294 262 174 276 411 308 310
Imports 135 137 153 138 153 190 217 248
Trade balance 87 157 108 36 123 221 91 62
Current account balance 10 72 38 -23 44 151 30 15
(% GDP) 1.5 8.5 4.6 -3.1 5.1 13.6 2.9 1.4
Official reserve assets 496 497 500 454 455 460 441 456

Social and demographic indicators

Population (million) 31.0 30.2 30.1 31.6 30.8 32.2 32.9 33.7
Saudi Unemployment (15+, %) 12.8 12.7 12.0 12.6 11.0 8.0 7.8 7.6
GDP per capita ($) 23,081 28,036 27,893 23,271 28,215 34,441 31,219 31,955

Sources: Jadwa Investment forecasts for 2023 and 2024. General Authority for Statistics for GDP, external trade and
demographic indicators, Saudi Central Bank for monetary indicators, Ministry of Finance for budgetary indicators.