Analysis Economy Saudi capital spending surges 38% on back of higher oil prices By Andy Sambidge September 20, 2022 Aramco Demand for Saudi oil has been underpinned by countries including the US, UK and Japan wanting to secure alternative suppliers as they reduce imports from Russia Kingdom’s GDP growth to reach 10-year high of 7.5 percentOil and non-oil sectors remain strong Some investors question Vision 2030‘s viability Capital expenditure surged in Saudi Arabia in the first half of 2022, part of a wider spending spree on the back of higher oil prices. S&P Global Ratings said capital expenditure (capex) rose by 38 percent to SR51 billion ($13.6 billion) despite this year’s initial budget statement forecasting it would fall. Revenue was up 43 percent to SR648 billion, led by a 75 percent increase in oil revenue and a more tepid five percent recovery in non-oil revenue, while total expenditure also rose 10 percent to SR513 billion during the same period. Despite the increase in spending, Saudi Arabia’s government is set to deliver a budget surplus of 6.3 percent of GDP in 2022, the first since 2013. The agency forecasts a further surplus of 3.5 percent in 2023 before a fall in oil prices leads to a return to deficits in 2024 and 2025. It affirmed its ‘A-/A-2’ ratings on Saudi Arabia, with the outlook remaining positive, saying it reflects strong GDP growth and fiscal dynamics tied to the country’s emergence from the coronavirus pandemic, rising oil production, and the government’s reform programmes. Middle East outlook ‘positive’ as largest economy eyes $1 trillion milestoneMbS has huge plans for the stock market – best take him seriouslySaudi invests $7bn in US giants from Microsoft to Starbucks Since the war in Ukraine began in late February, demand for Saudi hydrocarbons and petrochemicals has been underpinned by Western Alliance countries (including the US, EU, UK and Japan) wanting to swiftly secure alternative suppliers as they attempt to sharply reduce hydrocarbon imports from Russia. Macroeconomic reforms including efforts to drive non-oil economic growth via investment and mega-projects, widen the non-oil tax base, and de-couple the oil price from fiscal plans should also help support GDP growth and fiscal balances, S&P analysts noted in a research note. “We estimate Saudi Arabia’s GDP growth to reach a 10-year high of 7.5 percent in 2022, leading to a recovery in per capita GDP to above pre-pandemic levels and then averaging 2.5 percent in 2023-2025,” S&P said. “Non-oil sector growth also remains strong, with robust services growth as the economy continues to rebound after the pandemic. “The economy also benefits from large public investment projects, largely funded by the Public Investment Fund (PIF) and National Development Fund (NDF).” After a sharp pandemic-related contraction in 2020 Saudi Arabia began to rebound in 2021 alongside the global economic bounce, and oil demand and prices started picking up. The country’s real GDP grew by 3.2 percent in 2021. S&P’s estimate of Saudi’s GDP per capita fell to close to $20,100 in 2020, down from a pre-pandemic $23,500 in 2019, but it forecasts a rise to $28,700 in 2022. Real GDP expanded by 11 percent in the first half of 2022, its highest in over a decade. Growth was driven by a 22 percent increase in oil activity, reversing the contraction seen between the first quarter of 2020 and second quarter of 2021. Non-oil GDP growth picked up 5.9 percent during the same period, with mining and quarrying, wholesale and retail trade, and manufacturing leading a broad-based economic growth. Majority state-owned oil corporation Saudi Aramco also posted record-breaking profits in the first half of 2022 on higher oil prices and refining margins. This prompted the company to report the largest quarterly adjusted profit of any publicly listed company globally at $48.4 billion in the second quarter of 2022. The non-oil private sector continued to expand amid rising customer numbers, improving market conditions, strengthening export demand, and rapid job creation. First quarter data shows unemployment among Saudi nationals fell to 10.1 percent from 11.7 percent in Q1 2021, while overall unemployment including expats declined to six percent from 6.5 percent over the same period. The economy’s diversification away from oil and upstream crude production continues with the non-oil private sector accounting for well over half of GDP, significantly higher than a decade ago although much of the non-oil sector is in petrochemicals and hydrocarbon-related activities. However, S&P cautioned that while reform efforts have increased freedoms and jobs for women, they have struggled to create sufficient jobs for the fast-growing population. Futuristic mega projects such as The Line: “funding and profitability pressures may impede the pace”. Picture NEOM Despite significant labour market changes in recent years, more than 60 percent of the female workforce is still outside the labour market and most men are employed by the public sector. S&P added that while the government will continue to drive Vision 2030 megaprojects such as futuristic city Neom, the Qiddiyah entertainment project and the Red Sea tourism project, “funding and profitability pressures may impede the pace”. The agency also pointed out that investors have raised questions about some of the projects’ potential profitability and viability. S&P’s research said inflation in Saudi Arabia is relatively low compared with peers and is forecast to remain under control owing to administrative price controls on fuel and food, as well as the peg to the relatively strong US dollar. While inflation remains low by global standards, the kingdom has provided an additional allocation of SR20 billion to support low-income families as they mitigate against price pressures. This will translate into a larger increase in subsidies and social benefits in the second half of 2022, said analysts. Saudi Arabia posted a large budget surplus of SR135 billion in H1, reversing a deficit of SR12 billion in the same period of 2021.