Saudi Arabia: Year in Review 2012

The Saudi Arabian economy recorded another solid year of expansion in 2012, sustained by its energy sector and a steady rise in state spending. While growth may moderate in 2013, a number of sectors, including construction and banking, look set to continue expanding.

At the end of 2012, GDP was expected to grow as much as 8.8%, Al Rajhi Capital, a Riyadh-based financial services company, said in a November report. Much of this expansion was expected to come from strong energy prices, higher-than-expected oil output and increased state spending, part of the government’s long-term capital works programme.

However, growth is anticipated to moderate this year. Local financial groups have projected GDP to expand by between 3.3% and 3.5% in 2013 as demand for energy eases. The outlook for the non-oil sector is seen as stronger, with growth of between 5% and 9% expected.

While the economy grew in 2012, price rises remained in check. Inflation hovered around 3.6% at the end of the year, but this could increase in 2013 if consumer demand heats up further, as the effects of higher disposable incomes kick in.

Increased crude production, combined with rising oil prices, has put the Kingdom on track to generate record annual revenues for the energy sector, with November figures from Riyadh-based Jadwa Investments indicating that income could reach a yearly high of $288bn for 2012.

Oil production was higher than expected, running at 9.8m barrels per day (bpd) in the first 10 months of the year, according to Al Rajhi Capital. This is higher than the earlier expectation of 9.45m bpd. However, as increased capacity comes on-line elsewhere in the Middle East and North Africa, with Libya expected to return to full production and Iraq also stepping up exports, the Kingdom may scale back to around 9m bpd. Rising domestic demand, however, may require higher output and also eat into export earnings in the coming years.

The construction industry, meanwhile, is looking to an increasingly busy 2013. With the government committed to resolving the shortage of low-cost housing, promising to add 500,000 units to existing stocks, and also investing heavily in infrastructure, education and industry, the construction sector should benefit from the flood of capital-works funding this year and for the rest of the decade. With estimates putting the requirement for new housing at 264,000 units per year by 2020, combined with the extensive infrastructure programme, firms in the sector will be working at near full capacity through the medium term.

New legislation paving the way for banks to provide mortgages to clients should enable the uptake of these new houses and also see many banks’ loan portfolios − and earnings − expand substantially. Some estimates put the value of the mortgage market at around $32bn per year, a level that could be sustained for a decade or more.

One of the Kingdom’s major policy shifts in 2012 came into effect in mid-November, after the government decreed that private firms had to employ more Saudi nationals than foreign workers or else face paying an annual levy of $640 for every expatriate on staff above the total of local employees. The measure is one of a number taken by the government to reduce unemployment, with the Ministry of Labour (MoL) saying in late November that some 448,000 Saudis were seeking work, while up to 80% of private sector jobs were held by foreigners.

The need to create more job opportunities for locals is increasingly pressing, with the MoL estimating in January 2012 that some 3m jobs for Saudi nationals will have to be created by 2015 to drain the existing pool of job seekers and soak up the flow of new entrants to the workforce.