Saudi Arabia's non-oil private sector growth accelerates in May, PMI shows

Saudi Arabia's non-oil private sector activity accelerated in May, with the Riyad Bank PMI rising to 55.8 from 55.6 in April, fueled by a strong rebound in new orders and increased business confidence, which hit an 18-month high. Despite rising input costs due to higher supplier charges, firms reduced selling prices amid competitive pressures, while also increasing hiring and purchasing activity; the construction sector led the rise in activity and new business.

Analysis

Saudi Arabia's non-oil private sector demonstrated accelerated expansion in May, with the Riyad Bank Purchasing Managers’ Index (PMI) rising to 55.8 from April's 55.6, signaling sustained growth, albeit below the peak of 60.5 observed earlier in the year. This improvement was primarily driven by a significant rebound in new order volumes, which surged from an eight-month low in April, as indicated by the new order subindex jumping to 62.5 from 58.6, attributed to heightened demand, effective sales strategies, and new marketing efforts. While domestic demand appears robust, with the construction sector notably leading in activity and new business, new export orders experienced their slowest growth in seven months. Firms responded to increased output needs by increasing hiring, and purchasing activity saw its most rapid expansion since March 2024, facilitated by improved vendor delivery times and a more agile supply chain. A critical dynamic observed is the sharp rise in input prices, fueled by higher raw material costs, yet businesses, particularly in the services sector, reduced selling prices due to competitive pressures, potentially impacting profit margins. Despite this pricing pressure, business confidence reached an 18-month high, with companies citing expansion plans and optimistic demand outlooks.

Key Decisions for Investors

• Investors should consider the positive momentum in Saudi Arabia's non-oil private sector, particularly given the 18-month high in business confidence and accelerating PMI, suggesting potential opportunities in domestic-focused equities.
• It is crucial to scrutinize corporate profitability within the Saudi non-oil sector, especially for service-oriented companies, as they face rising input costs alongside competitive pressures forcing selling price reductions.
• The construction sector's leadership in growth and new business warrants specific attention for targeted investment strategies within the Kingdom.
• Monitor the trajectory of new export orders, as their decelerating growth could indicate emerging headwinds for internationally exposed segments of the Saudi non-oil economy, despite strong overall domestic demand.