Saudi- KSA petroleum refining sector set for sharp gains

Jan 11, 2015 12:00 AM

Saudi Arabia's economic growth is expected to fall to 2.5 percent in 2015 down from 3.7 percent in 2014 according to Jadwa Investment.

This lower predicted rate of growth is mainly due to an anticipated contraction in the oil sector by 0.6 percent Riyadh-based private equity house and investment bank said in its 2015 Saudi Economy Report.

'We expect that the economy will continue performing strongly in 2015 albeit at a slower pace than in the previous few years. Lower oil production will drag down overall GDP growth while the nonoil private sector will continue to record robust growth' said the Jadwa researchers.

The decline in oil prices will mean a narrowing current account surplus and a larger-than-budgeted fiscal deficit said the report. It said that oil production is expected to decline in 2015 compared with an increase of 0.5 percent in 2014.

'We predict a growth of 10 percent in the oil refining sector which puts it as the fastest growing sector in the Kingdom in 2015. This is because the sector is expected to benefit from significant additions to refining capacity' said the researchers.

The petroleum refining sector will benefit from the start up a 0.4 mmbpd Yasref refinery a joint venture between Saudi Aramco and China's Sinopec. This adds to the 400 thousand barrels per day (tbpd) Jubail refinery a joint venture between Saudi Aramco and Total which came fully on-line in 2014.

Both new refineries will cater for domestic demand but will also capture a larger share of the international trade in high value products through exports according to the Jadwa economists.

The nonoil private sector should continue to be the engine for growth in the economy benefiting from elevated government spending as well as corporate lending and solid domestic consumption. Construction and utilities are likely to be the fastest growing sectors of the private sector added the report.

With a record high spending of SR860 billion the Kingdom has budgeted for its first fiscal deficit since 2011 amounting to SR145 billion in 2015.

'We expect larger-than-budgeted expenditures as well as a deficit amounting to 6 percent of GDP. The government will draw down its foreign assets to finance its expenditure plans. This willingness and ability to support the economy will remain important as international and regional events have the potential to damage the economy' said the report.

'The main risks to our forecast stem from the external environment. A significant slowdown in global growth and geopolitical tensions constitute key risks' said the Jadwa economists.

The report predicted that a sustained period of lower oil prices would lead to a higher-than-forecasted fiscal deficit. This however is likely to have a small impact on the Saudi private sectors. This is because the momentum of growth in the Kingdom depends upon the government maintaining a higher level of spending that is comfortably afforded added the report.

Regional political uncertainty will continue cast a further shadow over the economy and any heightened tensions will hit businesses and consumer confidence. An absence of serious reform ongoing high growth in government spending and domestic energy consumption mean that barriers to long-term fiscal and income diversification challenges are likely to remain according to the report.

In 2014 the Saudi economy expanded by 3.6 percent accelerating from 2.7 percent in 2013. An increase in oil production by 0.8 percent year-on-year and a new refinery coming on-line during 2014 meant that overall oil sector growth remained positive at 1.7 percent while the non-oil sector maintained a growth of over 5 percent for the eleventh consecutive year in 2014. Based on our outlook for the current year we forecast overall economic growth to reach 2.5 percent in 2015 mainly pushed down by negative growth in the oil sector.

The nonoil sector will continue to benefit from government spending corporate lending and solid domestic consumption.

'We maintain our view that the economy is still driven by an expansionary fiscal policy. We forecast that total government spending will be equivalent to 36.3 percent of GDP compared with an average of 31.9 percent over the last 10 years' said the economists.

Capital spending by the government has an important psychological implication on private sector performance given the centrality of economic development planning. Budgeted investment spending was cut by 35 percent to SR185 billion for 2015.

While this is the first time since 2002 that the government has reduced its budgeted investment spending this was anticipated given the rapid growth in this type of spending over the last ten years which has averaged 25 percent per year. That said the current budgeted investment spending is 36 percent higher than its level five years ago.

This willingness and ability to support the economy will remain important as international and regional events dampen sentiment and create an increasingly difficult economic climate

The main economic risk is from the situation in the euro zone and any potential impact from a housing correction in China. The fluid regional political situation will continue to make foreign investors wary and may negatively affect the sales of companies that export to the region It also increases the risk of stock market and oil price volatility said the report.

It said that nonoil private sector GDP growth in 2015 is forecast at 5.3 percent compared with an average of 7.2 percent for the last five years. The latest economic data highlights that the economy has maintained robust performance albeit at a lower rate. The latest PMI at 57.9 in December indicates that the private sector remained in expansionary mode.

The report said cement sales a good gauge of construction activity have remained at similar levels compared to the same period of the previous year. This shows that construction activity has started to normalize following the impact of significant changes in the labor market.

Indicators of consumer spending and cash withdrawals from ATMs point to healthy growth during the year. Central Bank data shows that bank lending rose rapidly during 2014 with year-to-November net credit issued reaching SR137.5 billion; a SR13 billion increase in new credit compared to the same period last year. The rapid growth in credit points to the willingness of banks to support economic activity in an environment of very low interest rates added the report.

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