Saudi Private Sector Grows to Highest Level in 6 Months

People are seen at an employment forum in Saudi Arabia. (SPA)
People are seen at an employment forum in Saudi Arabia. (SPA)
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Saudi Private Sector Grows to Highest Level in 6 Months

People are seen at an employment forum in Saudi Arabia. (SPA)
People are seen at an employment forum in Saudi Arabia. (SPA)

Saudi Arabia’s non-oil private sector expanded for the third consecutive month in October, driven by a surge in new orders - their highest levels since March - and a substantial rise in sales, which significantly boosted business activity.

The Riyad Bank Purchasing Managers’ Index (PMI) increased from 56.3 in September to 56.9 in October, reflecting improved operating conditions and economic momentum. This growth was attributed to robust sales in October, as companies reported strong customer demand and overall favorable economic conditions.

Consequently, businesses experienced an expansion in commercial activity and maintained a positive outlook for future growth. Additionally, purchasing of production inputs accelerated after reaching a three-year low in September, though it remained moderate compared to early-year levels, with companies noting sufficient inventory levels.

The report highlighted, however, that the strong sector-wide improvement was accompanied by increased cost pressures in materials and staffing, resulting in the first rise in average prices for goods and services in four months.

Dr. Naif Al-Ghaith, Chief Economist at Riyad Bank, told Asharq Al-Awsat that the robust economic performance was driven by a notable rise in sales, contributing to expansions in employment, procurement, and inventory.

The accelerated pace of input purchases in September, the fastest in three years, reflects a continued expansionary trend since September 2020, driven by rising demand, he stressed

The significant increase in new orders in October underscores the success of Vision 2030’s strategic emphasis on innovation and infrastructure development, he added.

More than 40% of surveyed companies reported increased demand, driven by strong local customer interest, creative marketing strategies, and sustained investments in infrastructure, demonstrating the resilience of Saudi Arabia’s economy and reinforcing its position as a leading non-oil economy in the region.

He noted that these gains align with the non-oil GDP growth rate of 4.2% in the third quarter, indicating a positive economic shift as the country seeks to diversify income sources away from oil, contributing to Vision 2030’s goals of building a sustainable economy capable of meeting future challenges.

Al-Ghaith projected that the non-oil sector’s contribution to GDP would exceed 52%, with growth surpassing 4% this year.



How Will Anticipated US Interest Rate Cut Impact Gulf Economies?

Standard & Poor’s analysts said that lower interest rates should boost Gulf non-oil economies. (Photo: Reuters)
Standard & Poor’s analysts said that lower interest rates should boost Gulf non-oil economies. (Photo: Reuters)
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How Will Anticipated US Interest Rate Cut Impact Gulf Economies?

Standard & Poor’s analysts said that lower interest rates should boost Gulf non-oil economies. (Photo: Reuters)
Standard & Poor’s analysts said that lower interest rates should boost Gulf non-oil economies. (Photo: Reuters)

The US Federal Reserve is expected to reduce interest rates again at its upcoming meeting, a decision anticipated to affect Gulf economies and their banking sectors.

The Federal Open Market Committee plans to meet for two days starting Wednesday, and market forecasts suggest a rate cut of 25 basis points. This adjustment is likely to prompt similar reductions by Gulf central banks, whose currencies are pegged to the US dollar, with the exception of Kuwait, which follows a currency basket.

Sovereign analyst at Standard & Poor’s Zahabiya Gupta said that lower interest rates should boost Gulf non-oil economies by supporting demand for credit and sectors like real estate and construction.

“We expect average growth of 3.3% in the Gulf from 2024 to 2027, compared to 1% in 2023, supported by strong non-oil activity and increased oil production,” she remarked.

Gupta added that monetary easing should also help reduce debt service costs for governments, especially those with high borrowing needs, like Saudi Arabia in absolute terms and Bahrain as a percentage of GDP. Inflation rates are expected to remain relatively low, given managed prices on many goods and the relatively strong dollar peg.

For his part, Credit analyst Dr. Mohamed Damak from Standard & Poor’s told Asharq Al-Awsat that Gulf banks’ profitability is expected to remain strong in 2024, buoyed by a delay in rate cuts, resilient asset quality, supportive economies, limited leverage, and high precautionary reserves.

“We expect a slight deterioration in profitability in 2025 as the Fed continues cutting rates, with a total anticipated decrease of 225 basis points, including the 50 basis point cut made in September 2024, which Gulf central banks are likely to follow,” he stated.

Yet, lower rates may also lessen unrealized losses Gulf banks have accumulated over the past two years, which are estimated at about $2.8 billion, or approximately 1.9% of shareholder equity, he underlined.

The negative impact of rate cuts may be partially offset by several factors, Damak explained, saying that Gulf banks can mitigate these effects through strategic balance sheet adjustments, such as locking in current rates or switching from variable to fixed rates. Another factor includes the potential shift of deposits back to non-interest-bearing instruments, reversing the trend of recent years when deposits moved to interest-bearing accounts due to rising rates.

Lower rates could also reduce banks’ risk costs, as companies may find it easier to meet their debt obligations, improving creditworthiness and lowering the need for banks to set aside provisions. Additionally, accelerated loan growth could help counterbalance lower margins, especially in high-demand markets like Saudi Arabia, driven by large-scale Vision 2030 projects.

Damak noted that the impact of lower rates on liquidity levels would likely be neutral overall, with an expected reduction in unrealized losses within Gulf banks’ investment portfolios, albeit by a modest amount ($2.8 billion by the end of 2023). Lower rates might also encourage Gulf banks to tap international capital markets more actively, especially in countries needing extra liquidity to stimulate loan growth, such as Saudi Arabia.