Even though the anticipated Saudi National Transformation Plan (NTP) will aim to diversify the economy away from oil, the oil story still remains pivotal and valid, the National Commercial Bank says in its latest Saudi Economic Perspectives 2016-2017 report.
In 2015, oil contributed 42.7 percent to real GDP and represented 73.1 percent of total fiscal revenues. Despite bottoming-out in February, downside risks on oil prices remain entrenched due to record inventory levels, technological advancements in shale fracking and sluggish global demand growth. Additionally, lower compliance among OPEC members implies that excess supply will continue throughout this year, and as such we do not foresee Saudi cutting its record oil production levels anytime soon, neither unilaterally or collectively. Interestingly, recent government announcements underscored adamancy to protect market share at any cost, with the possibility of increasing output to 11.5 million bpd.
According to baseline scenario for 2016, NCB assumes oil prices to average 45 per barrel and Saudi production to remain at 10.2 million bpd, and in turn oil revenues are expected to decline to SR386.3 billion, 13.1 percent lower than 2015. On a medium-term note, prolonged low oil prices will force high cost oil producers to curtail capital spending, reduce investments, and in turn reduce supply, thus, putting upward pressure on prices as inventory levels gradually return to normal levels.
The non-oil sector is expected to moderate further this year to below 3 percent, as the economic slowdown weighs on businesses and consumer confidence alike. The sector will continue to be impacted by the negative spillover effects from collapsing oil revenues and the recent reductions in subsidies.
The NCB report said rationalization of government spending, the only channel to convert the country’s oil wealth into economic development, has affected the outlook for business sentiment, evident from our forward looking NCB Business Optimism Index (BOI), whereby the non-hydrocarbon sector composite index for Q2, 2016 posted the sixth quarterly decline to settle at 21 points, which is also the second lowest level since the inception of the index in 2009.
Additionally, consumer activity, gauged by cash withdrawals and Point Of Sale (POS) transactions had been indicative of a less buoyant outlook.
During the month of February, cash withdrawals declined by 13.3 percent Y/Y, while POS transaction values retreated by 9.0 percent annually, the largest decline since June 2009.
In an attempt to control spending, the Ministry of Finance has stopped awarding contracts since Q4, 2015, which has affected the construction sector. The construction market will seek a greater reliance on private sector initiatives to support a declining projects market. Consequently, the value of awarded construction contracts to fall significantly below the SR200 billion, the weakest level since 2010. The oil & gas sector is expected to continue receiving the majority of construction contracts, underpinned by Saudi Aramco’s announcement of sustaining investments despite low oil prices.
The oil sector secured 36.6 percent of total contracts in 2015, according to NCB’s Construction Contract Awards Index. Despite the recent moderation, the fact that contracts awarded amounted to around SR1.6 trillion during the period 2008-2015, will continue to provide support to the sector via “momentum spending”, resulting in an expected 3.0 percent expansion in 2016.
Source: Arab News