Saudi economy may be entering difficult period

RIYADH: Strong population growth and rising incomes among women in Saudi Arabia should offset any blow to the economy from low oil prices, according to one of the country’s largest retailers. Jarir Marketing Co said it expects to continue expanding robustly as a result.

The company, Saudi Arabia’s second largest listed retailer by market value, will go ahead with its plan, announced last year, to invest 1.1 billion riyals ($293 million) over five years to open six to seven new stores on average each year, Muhammad al-Agil, its chairman, told Reuters. The company, which has 39 stores in Saudi Arabia, Abu Dhabi, Kuwait and Qatar, thinks it can achieve the annual net profit growth of 15 percent or more annually which analysts have forecast for it, Agil said in an interview for the Reuters Middle East Investment Summit.

“We have lived this three or four times before since 1980 – we are not concerned by negative sentiment,” Agil said of the plunge of oil prices since mid-2014, which has slashed government revenues. “What could happen? Seventy to 80 percent of Saudis work for the government, and the government is not going to change its payroll.”

After years in which state spending rose continuously on the back of sky-high oil prices, the Saudi economy may be in for a more difficult period; many economists expect growth to slow in 2016 from its current rate of roughly 3 percent.

The government is running an annual budget deficit of over $100 billion, which will exhaust its financial reserves in several years if policies do not change. As a result, officials are considering spending and subsidy cuts and even tax rises, all of which could hurt consumer spending and corporate profits.

However, Agil said: “People can think about it negatively, but we look at it as an opportunity … This is a time of opportunity for us to increase our market share through stronger marketing and aggressive store opening.”

Saudi Arabia’s young population of about 21 million local citizens has been growing at a rate of over 2 percent annually. Meanwhile, the government has been encouraging women to take jobs. Local media quoted the labor minister last month as saying the number of female workers in the private sector had jumped to 350,000 from 50,000 in 2011.

“We have easy expansion inside Saudi because of increasing population and growth in household income, thanks to the opening of opportunities for women to work,” Agil said.

“When an employee gets 6,000 riyals ($1,600) a month and his wife with a high school degree gets 4,000 riyals, the household income will increase almost 70 percent – this is actually making a difference, and we are seeing it,” Agil said.

Jarir reported a 7.6 percent year-on-year increase in third-quarter net profit to 218.5 million riyals. Its shares are up 143 percent since the end of 2010, far outpacing an 8 percent gain for the main market index in that period, though the shares have plunged 32 percent from this year’s peak as the outlook for the economy and the market has darkened.

Agil said Jarir’s like-for-like store sales were continuing to rise, helped by an aggressive social media campaign; he said the company had 1.98 million Facebook followers and over 1 million Twitter followers. Many Saudi companies are expanding their use of social media in an effort to broaden their consumer bases and obtain cost-free advertising.

Liquidity in the banking system has started to tighten because of the state budget deficit, as the government issues bonds to help finance the gap. But Agil said borrowing rates and the availability of funds had not changed for Jarir.

“We are very liquid. Three years ago, our debt-to-equity was 20 percent and now it is coming down to less than 2 percent as of September. Our liabilities are only 132 million riyals.” – Reuters

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