Saudi Arabia: Non-oil sector at highest level
A business survey showed that Saudi Arabia’s non-oil private sector recorded its fastest growth pace in six months in August, driven by rising production as market activity recovered. The Saudi Purchasing Managers’ Index (PMI) issued by Al-Rajhi Bank, based on data collected by S&P Global, rose to 53.8 points in August from 53.1 in July, according to Reuters. A reading of 50 points marks the dividing line between expansion and contraction.
Naif Al-Ghaith, chief economist at Al-Rajhi Bank, said this improvement reflects continued recovery in market activity, with production expanding at its strongest pace in seven months and approaching its long-term average. Production growth accelerated to its highest level in seven months, while new orders rose for the fifth consecutive month following a brief dip in March. Export orders fell for the sixth consecutive month, with the pace of decline accelerating; companies attributed this to regional conflict and foreign competition.
Employment rose for the second consecutive month, but hiring remained modest as backlogs of work declined for the third straight month, indicating that firms still have excess capacity despite increased activity. Input purchases rose at the fastest pace since February. Cost pressures remained elevated, although they eased to their lowest level in five months. Staff costs rose at the fastest pace since February, while production price inflation slowed to its lowest level since March. Business confidence rebounded to its highest level in seven months.
Exactly 20% of companies expected activity to rise over the next twelve months, while 2% anticipated a decline, with sentiment bolstered by financial support and development projects.
Meanwhile, Bishar Al-Natour, Global Head of Islamic Finance at Fitch Ratings, predicted that Saudi and Gulf banks would continue to turn to debt markets and sukuk issuances, particularly in US dollars, in the near future. This trend is driven by loan growth outpacing deposit growth, prompting financial institutions to diversify funding sources and maintain their credit expansion pace.
Al-Natour noted that Saudi banks have been diversifying their funding sources for years, explaining that “deposit growth no longer keeps pace with loan growth, creating a funding gap that banks need to cover through sukuk and bond issuances.” He added that these issuances are not limited to Saudi banks but extend to other Gulf banks, anticipating continued strong activity in debt markets, whether to diversify funding sources or to keep pace with robust loan growth.
Regarding the impact of rising US Treasury yields on issuance costs, Al-Natour clarified that financing costs are influenced by two main factors: the base yield linked to US bonds and issuer-specific yield spreads. He said that while higher US yields have naturally increased the required yields on new issuances, the outlook appears more positive regarding spreads in Saudi Arabia.
