SAUDI: Latest data show the economy remains firm as fiscal easing increases but global headwinds will continue to weigh on equities

GULF COUNTRIES - In Brief 09 Aug 2019 by Rory Fyfe

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July PMI data shows the non-oil economy remains strong, consistent with the latest Q2 fiscal data, which revealed a deficit that had widened to USD9bn.The authorities are pursuing accommodative fiscal policy to prop up growth despite a global oil demand shock weighing on oil prices. However, reform policies continue to weigh on the labour market, which risks becoming a structural issue.Our core Saudi macro calls are unchanged: non-oil growth will average 2.6% and the deficit will widen to 9% of GDP for 2019. We expect deficits to grow progressively larger in the second half of the year and the authorities to pursue an additional sovereign issuance of USD10-20bn.Despite the positive macro outlook, increasing trade tensions are evolving into a global oil demand shock which has weighed sharply on Saudi equities since mid-July. We expect this trend to continue as oil prices and equities are more closely correlated than activity measures and equities.July PMI data showed the non-oil economy remains strong with a reading of 59. While this is a slight dip from the elevated 61 in June, it is well above the 55 average level over 2017-2018. New orders are the biggest driver of the PMI, suggesting domestic demand conditions are what is behind the uptick. Export orders remain tepid in line with the OPEC cuts of crude deliveries. The employment sub-index also remains weak, hovering around 50 for nearly all of 2019. This is consistent with our on the ground views confirming that the pressure to increase Saudis employment share at the expense of foreigners is increasing. This is quickly becoming a major structural issue as the supply of skilled Saudi labour is limited and in aggregat...