Economy

New factories underpin Saudi non-oil activity surge

August 27, 2024

new Saudi factories, Saudi industrial growth, Saudi manufacturing, Saudi economy — A solar panel factory near Riyadh. Investment in new factories in Saudi Arabia is driving non-oil business activity

$1.6bn of investment into 300 factories
7,400 new jobs created
New openings of 10% a year

Investment of nearly SAR6 billion ($1.6 billion) in 300 new factories in Saudi Arabia has spurred a resurgence in non-oil activity in the kingdom, as oil production hits a three-year low.

Estimates in a report by Riyadh-based advisory company Jadwa Investments found that non-oil GDP in the first half of 2024 was up by around 4 percent.

This represented “a healthy rebound” in the second quarter, where growth was 4.4 percent, compared with “decent, albeit slowing, performance” in the first three months of the year when growth was pegged at 3.4 percent, the report said.

Across the sectors, industrial production performed the best, growing at 6.7 percent across the first half of the year.

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Output is likely to be enhanced by around 300 new industrial factories that started production in the year to April, creating 7,400 new jobs, the report said.

The Saudi Press Agency reported in February that there were 11,549 factories operating in Saudi Arabia in 2023, growing by around 10 percent per annum.

A major factor impacting the industrial sector’s progress has been the government waiving the cost of fees for expatriates working in the sector in October 2019.

Originally put in place for five years, last month it was announced the policy would be extended until the end of next year. This strategy has saved companies around SAR5 billion in costs per year, Jadwa estimated.

The accelerated growth in the non-oil sector in Q2 is expected to continue into the second half of the year as the vital oil sector continues to decline.

Sales of crude oil and refined products fell to a three-year low in June, as a result of a drop in prices and ongoing cuts in production instigated by Saudi Arabia, it was reported last week.

Receipts from shipments for the month were down to $17.7 billion – a fall of more than 9 percent year on year and 12 percent month on month – according to figures released by the General Authority for Statistics.

The diverging growth figures for the oil and non-oil sectors meant the percentage of oil shipments out of total exports decreased from 77.4 percent in the second quarter of 2023, to 75 percent for the corresponding period this year.

With oil prices down from $80+ per barrel last year and hovering between $75 and $80, as production dips to nine million barrels per day, Saudi Arabia faces rising fiscal pressure.

The International Monetary Fund estimates that the kingdom, the world’s largest oil producer, requires a price of $96 per barrel to balance its books.

Jadwa has forecast that the Brent crude price will average around $84 per barrel in 2024, falling to $82 in 2025 on the back of increased supply and lower demand.

As a result, the company estimates that the kingdom will report a budget deficit of SAR83 billion, or 2 percent of GDP in 2024, similar to 2023.

For next year, this is expected to rise to 2.5 percent of GDP, especially as funding requirements for the $1.25 trillion worth of giga-projects increase and oil revenue remains lower than necessary.