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Economy

Saudi Arabia’s non-oil private sector accelerates, boost economic outlook

(Last Updated On: October 11, 2023)

Saudi Arabia’s non-oil private sector has been on a growth trajectory since the start of 2022, and the latest Riyad Bank Saudi Arabia PMI report has shown that the trend continued in February 2023. The Kingdom’s Purchasing Managers’ Index rose to 59.8 in February from 58.2 in January, indicating the highest growth since 2015.

The PMI is a survey-based index that tracks the economic activity of businesses in the private sector. It is calculated by taking into account factors such as new orders, production, employment, supplier deliveries, and inventories. Readings above 50 indicate growth, while those below 50 signify contraction.

Faster growth

The latest PMI report showed that firms in the Kingdom reported faster upturns in output, employment, and purchasing, driven by a substantial increase in demand linked to improving economic conditions. In addition, job numbers in non-oil companies rose at the second-fastest rate in five years, mainly because firms increased their hiring to fill vacancies in order to meet future demand.

“Economic conditions remain favorable across business activities in February 2023, as growth in the Saudi non-oil private sector accelerated to the highest level in almost eight years,” said Naif Al-Ghaith, chief economist at Riyad Bank.

He added that despite tighter monetary conditions, the demand and supply balance remained robust, spurred by the ongoing projects around the Kingdom. This was met by a strong improvement in supplier performance and sharp reduction in lead times.

Demand continues

The report highlighted that the current elevated demand is expected to continue in the medium term. Businesses in the Kingdom displayed a robust degree of confidence toward future activity as the current improved market conditions are promising, coupled with positive expectations toward the pickup in emerging economies.

The growth in the non-oil private sector is particularly significant for the Saudi Arabian economy, which has been trying to diversify away from its heavy reliance on oil. The government has been implementing various reforms to achieve its Vision 2030 plan, which aims to reduce the country’s dependence on oil, boost non-oil exports, and increase foreign investment.

One of the ways to achieve this goal is by developing the private sector and attracting foreign investment. The government has been offering various incentives to encourage foreign companies to invest in the Kingdom, such as tax breaks, streamlined regulations, and improved infrastructure. The growth in the non-oil private sector is an indicator that these efforts are bearing fruit.

The report noted that the rise in PMI was driven by the services and construction sectors, which saw a sharp increase in demand. Prices have responded to the surge in demand, with the increase in input costs evident especially in these sectors. This has led to higher inflationary pressures, with the report pointing out that inflation is expected to remain just below 3 percent in the medium term amid ongoing cost pressures.

While the growth in the non-oil private sector is positive news for the Saudi Arabian economy, there are still challenges that need to be addressed. One of the key challenges is the high youth unemployment rate, which is estimated to be around 30 percent. The government has launched various initiatives to address this issue, such as the National Transformation Program (NTP) and the Human Resources Development Fund (HRDF).

Boost economic growth

The NTP aims to create jobs and boost economic growth by implementing various reforms, such as increasing the participation of women in the workforce and encouraging entrepreneurship. The HRDF provides training programs to help Saudis acquire the skills needed to enter the workforce.

The government has been trying to reduce its dependence on oil by investing in various sectors such as tourism and manufacturing.

The report also highlighted that the Kingdom’s non-oil exports continued to increase, albeit at a slower pace. This was attributed to the effects of the pandemic on global demand, which in turn slowed the pace of export growth in February. However, this did not significantly impact the overall positive outlook of the non-oil private sector.

The report further stated that the employment sub-index increased for the fourth consecutive month in February, reaching its highest level since June 2016. According to the report, businesses in the non-oil private sector hired more staff in response to stronger demand, which bodes well for the Kingdom’s overall economic growth.

Overall economic performance

The non-oil private sector accounts for the majority of economic activity in the Kingdom, and its growth is therefore a key indicator of the country’s overall economic performance. The fact that the sector is experiencing such robust growth is a positive sign for the economy as a whole, particularly as the country seeks to diversify away from oil and reduce its reliance on the sector.

Moreover, the strong performance of the non-oil private sector comes at a time when the country is undertaking significant economic reforms as part of its Vision 2030 plan. This plan seeks to diversify the economy and reduce the country’s reliance on oil, as well as develop new industries and create more job opportunities for Saudi citizens.

The Riyad Bank Saudi Arabia PMI report indicates that the non-oil private sector is indeed playing a key role in achieving these objectives. With businesses in the sector hiring more staff and investing in new projects, the sector is helping to create new job opportunities and drive economic growth.

Optimistic future

The report’s findings also suggest that businesses in the non-oil private sector are optimistic about the future, with many expressing confidence in the outlook for the year ahead. This is particularly encouraging, as it suggests that the positive momentum in the sector is likely to continue, and could even accelerate in the months to come.

However, the report did note that the strong demand in the non-oil private sector is putting upward pressure on prices. Inflationary pressures have been rising in recent months, particularly in the services and construction sectors, and this trend is likely to continue in the near term.

This is a concern for policymakers, who will need to balance the need to support economic growth with the need to contain inflation. The report suggests that the central bank may need to adopt tighter monetary policies in the coming months in order to prevent inflation from rising further.

The Riyad Bank Saudi Arabia PMI report for February 2023 indicates that the non-oil private sector in the Kingdom is experiencing strong growth, driven by robust demand and rising employment. This is a positive sign for the economy as a whole, particularly as the country seeks to diversify away from oil and develop new industries. However, policymakers will need to keep a close eye on inflationary pressures, which are likely to remain elevated in the near term.

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