Saudi GDP surges 11.8%, its fastest quarterly rise since 2011

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• Oil activity up 23%, says Riyadh’s General Authority for Statistics
• Non-oil new business hit an eight-month high in June
• Demand is strong for office and retail space, driving up rental rates

Saudi Arabia’s gross domestic product is growing at the fastest rate for more than a decade, rising 11.8 percent in the second quarter, according to a flash estimate from the kingdom’s General Authority for Statistics.

GASTAT said the year-on-year increase – the most rapid acceleration since the third quarter of 2011 – was driven by a 23 percent rise in oil activity as prices surge.

“The Saudi economy has had a very strong first half of the year,” said James Swanston, a Middle East analyst with London-based Capital Economics. “Our long-held forecast is that the economy will grow by 10 percent this year, which sits well above the consensus expectation of 7.7 percent – which itself has risen from 6.3 percent since April.”

Outside the oil sector, demand for residential and office space has boosted real estate in the second quarter, and new business is defying rising inflation.

The S&P Global Saudi Arabia Purchasing Managers’ Index for June found that non-oil new business expanded at its fastest pace since October 2021, helped to offset the inflationary impact of rising costs.

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“Saudi Arabia’s non-oil economy continued to go from strength to strength in June, with the PMI picking up to an eight-month high of 57.0 and posting well above the 50.0 no-change mark,” said David Owen, economist at S&P Global Market Intelligence.

“The upturn was underlined by a robust increase in new business levels, which encouraged firms to expand their output sharply and make greater input purchases.”

He added: “While some companies reported concerns that sustained price rises could put a brake on the current path of growth, the latest survey data signalled overall output confidence picking up to a 17-month high. This positivity supported another mild increase in employment, as well as efforts to build stocks for future demand.”

The index reported that foreign demand was also increasing, with strong growth in new export orders.

More businesses relocate to Riyadh

A report published last week by real estate firm JLL found that Riyadh continues to attract government and related entities, globally and locally, as they expand their footprints or relocate to the kingdom’s business hub. 

As a result, demand for good-quality floorspace has improved, with average lease rates for Grade A buildings increasing by 6 percent to 1,475 Saudi riyals ($393.33) per square metres per annum in Q2 2022. 

In February last year, Crown Prince Mohammed bin Salman announced plans to transform Riyadh into one of the top cities in the world, create 35,000 jobs for Saudi nationals and boost the national economy by up to 70 billion riyals by 2030.

As part of the plan, the Saudi government announced that from January 1, 2024, it would cease offering contracts to international companies that did not have their regional headquarters located in the kingdom.

Twenty-four international firms, including PepsiCo, Schlumberger, Deloitte, PwC, Tim Hortons, Bechtel, Bosch and Boston Scientific, have already signed up to the programme, according to the Royal Commission for Riyadh City.

“The number of international business licenses surged by 358 percent last year, with most of the demand concentrated on the capital, Riyadh. Unsurprisingly, occupancy levels across the city’s prime office buildings have climbed, hitting 96 percent, the highest level in at least five years,” said Faisal Durrani, head of Middle East research at real estate advisory firm Knight Frank.

Forty-four percent of the 2,056 investment licenses in the final quarter of 2021 were from the retail and e-commerce sector, Knight Frank said. This had led to rental rates in Riyadh’s largest malls increasing 1 percent to 2,716 riyals per square metre over the past 12 months. In smaller malls, rates have risen by 1.4 percent year-on-year.

“We have noted a steady stream of requirements from international retailers looking to enter the kingdom, with a focus on Riyadh, putting upward pressure on rents.

“Malls are the primary target for these new entrants and regional and super-regional mall lease rates are beginning to creep up as new requirements gather pace,” said Pedro Riberio, head of KSA Retail Advisory at Knight Frank.

Consumer spending and residential demand rising too

The latest data from the Saudi Arabian Monetary Authority also records a rise in consumer spending, with the value of point-of-sale transactions rising by 16 percent year-on-year in April and May.

The residential sector in Riyadh is growing too, with 16,000 new units added in the second quarter – compared to 9,000 across the rest of the kingdom.

“In Riyadh, underlying demand for residential properties remains strong and is expected to continue to strengthen over the longer term,” the JLL report said.

The rise in stock is part of the government’s Vision 2030 goal to make Riyadh one of the 10 largest cities in the world and in line with the Iskan programme, which has set a target to raise Saudi homeownership to 70 percent.

Budget bounceback

The kingdom expects to post its first budget surplus for nearly a decade in 2022, thanks to rising oil prices

It could have an extra 90 billion riyals – 2.5 percent of GDP – left at the end of this year, but this figure is likely to be even higher if oil prices remain above the kingdom’s break-even point of $80 a barrel.

Saudi Arabia’s reserves have almost halved in the past five years, as the government splashed out $70 billion on investment plans and dealt with the coronavirus pandemic, but ratings agency Fitch Solutions told AGBI last month it predicted that reserves will recover in the coming years.

At the end of 2021, total reserve assets, including gold, reserves at the IMF, foreign currency deposits abroad and investments in foreign securities amounted to $455.4 billion. 

Fitch predicts that this will rise to $468.6 billion at the end of this year and grow to $513.6 billion by 2026. Saudi Arabia therefore has sufficient reserves to cover roughly 22.5 months of import costs.