Saudi consumer boom may outlast state spending

A personal consumption boom in Saudi Arabia is lifting retailers such as Jarir.

Written by Agencies | Riyadh | Published: October 17, 2012 10:25 pm

Saeed al-Mutairi,a bespectacled 27-year-old Saudi Arabian technical college graduate with a diploma in IT support,can finally afford to marry after two years looking for a job.

Now I’m saving enough to get married and my fiancee is very happy,said Mutairi,who started work two months ago as a cashier at the newest outlet in Riyadh of Jarir Bookstores,which is part of Jarir Marketing Co,Saudi Arabia’s largest listed retailer.

A personal consumption boom in Saudi Arabia is lifting retailers such as Jarir,which sells electronics,books,art materials and office supplies.

Increased government spending is filling Saudi wallets through an expanding public payroll,unemployment benefits and the stimulus effect of new infrastructure projects.

Such booms have occurred in the past,in an economy which is sensitive to the ups and downs of the state-run oil industry. But this time,the strength of private consumption suggests it may have gained critical momentum,so it may stay high even when government spending eventually slows.

Public sector salaries increased last year,there are government initiatives to increase the number of Saudi nationals working in the private sector and to push companies to raise wages for Saudis. These things will maintain very strong retail growth,said Fahad Alturki,chief economist at Jadwa Investment in Riyadh.

Government spending

Although Saudi Arabia’s oil makes it a wealthy country,with per capita gross domestic product of about $23,000,many ordinary Saudis have uncertain job prospects and modest salaries by developed-world standards. Mutairi’s monthly salary is about 5,100 riyals ($1,360).

But state support is now lifting the consumption of even poorer Saudis. Government spending has soared since 2011,partly in response to uprisings around the Arab world; to help maintain social peace,King Abdullah promised $110 billion of additional expenditure over several years on infrastructure and welfare.

Nearly 300,000 Saudis have secured new government jobs in 2012 as a result of state employment schemes,the official Saudi Press Agency quoted the cabinet as saying last month – a big number in a country with about 3.8 million local citizens in the workforce,and where the unemployment rate among locals was officially estimated early this year at about 10 percent.

Construction companies have been expanding employment after the government last year promised to build half a million new houses,610 new schools and 12 new hospitals.

In April the Labour Ministry said over 1 million people had signed up for a new unemployment benefit known as hafiz,which pays 2,000 riyals ($533) a month for up to one year.

The result of all this spending has been to put the retail sector on steroids. For Jarir the effect has been profound,with sales jumping from 2.56 billion riyals in 2009 to 4.15 billion riyals last year. Net profit in the third quarter of last year ballooned 48 percent from a year earlier,and it grew a further 5 percent in the third quarter of 2012.

In Riyadh we thought five stores were enough. Now we have nine stores. Even if we double the number of stores,there’s room for new stores. And even our existing stores are growing. We’re not cannibalising other stores,chief executive Mohammed Al Agil said.

Central bank figures show the value of credit and debit card purchases jumped by 19 percent in August from a year earlier,Jadwa Investment’s Alturki said.

In August,bank lending to the private sector surged 14.0 percent from a year earlier,according to central bank data. Consumer lending climbed 28 percent in the second quarter.

The consumption boom seems to have been acclerated by a government quota system,launched last year,which pushes firms to hire minimum numbers of Saudis instead of foreign workers.

This has caused private firms to lift wages to prevent local staff from defecting to the public sector,in a country where roughly nine in 10 working Saudis are employed by the state.

A key question among many businessmen is whether the consumer boom will continue when the stimulus from rising state spending eventually fades.

The International Monetary Fund warned in August that the government must ultimately rein in expansion of its budget,if it wants to preserve oil wealth for future generations.

The expansion is already moderating; after a 23 percent jump last year,Jadwa Investment forecast this month that actual government spending in 2012 would total 757 billion riyals,still a very high level historically but a 5.8 percent contraction from 2011’s record level.

This,combined with slightly lower oil output and prices this year,slowed Saudi Arabia’s annual GDP growth to 5.5 percent in the second quarter of this year from 5.9 percent in the first quarter,and 7.1 percent in 2011.

Private Sector

So far,however,there are signs that consumption growth may stay high even with government largesse decreasing.

As growth of the oil and government sectors slowed during the second quarter,private sector growth actually rose to 6.4 percent from 6.3 percent for the first quarter,according to the GDP data. The private sector accounts for about half of GDP.

A monthly survey of over 400 companies published in early October,the SABB HSBC Saudi Arabia Purchasing Managers’ Index,showed growth of business activity in the private sector at a four-month high,with new orders rising strongly.

Compared to last year we’re not seeing the same kind of growth but we’re seeing the situation stabilised. The high spending levels,the high activity levels are persisting,said Jarmo Kotilaine,a prominent local economist.

He said government efforts to liberalise the economy over the past decade were starting to pay off in terms of private sector growth,while banks were resuming lending after temporarily being deterred by the global financial crisis that began in 2008-2009.

Saudi reforms in the past 18 months have included policies to stimulate home mortage loans and lending to small and medium-sized enterprises,and efforts to bolster human capital through training programmes.

The government upped spending aggressively last year. That will run for several years,but after time the effects will wane and the expectation is that over time,more activity will shift into the private sector,said Kotilaine.

That may take some further policy initiatives,although it is clearly happening with more private-sector lending.

Jarir’s CEO Agil is planning for the boom to continue; he said he expected his company to roughly double its number of shops in the next five years from the 32 already open around the kingdom,despite expansion by its competitors.

While he saves for his wedding Mutairi,the new Jarir cashier,has started spending some of his salary on consumer goods.

I’ve bought lots of things since starting to work here,including a new laptop from Jarir,he said.

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