March 2, 2020 / 1:38 PM / a month ago

Saudi private sector strong in January but coronavirus may reverse growth

DUBAI, March 2 (Reuters) - A relatively strong start to the year for Saudi Arabia’s private sector may prove short-lived as the coronavirus outbreak is seen hurting the tourism sector and consumer spending.

Loans to the private sector – whose growth is essential to Crown Prince Mohammed bin Salman’s plans to transform the oil-dependent economy – rose 8.5% year-on-year in January, data from the central bank, Saudi Arabia Monetary Authority, showed last week, with a rise in mortgages backing the uptick.

Consumer spending was driven by a 33% annual jump in “point of sales” transactions, particularly for hotels and restaurants, a reflection of Saudi reforms that have relaxed social habits in the conservative kingdom.

But the spread of coronavirus is expected to weigh on the Saudi economy because of a slowdown in global demand for oil and tourism curbs introduced by Saudi authorities.

“The strong growth seen in the month of January is likely to be reversed in February and March as the COVID-9 impact should start reflecting on consumer sentiment, mall traffic, tourism activity, logistics,” Dubai-based Arqaam Capital said in a note on Monday.

Saudi Arabia - which has not reported any cases of the flu-like virus – last week closed its borders to foreign “umrah” pilgrims and to tourists from at least 25 countries where the new coronavirus has been found.

Pilgrimage is an important revenue source for the kingdom, which has Islam’s two holiest sites in Mecca and Medina.

Analysts have said the effects on the Saudi economy of the travel restrictions could be significant. The tourism sector accounts for 10% of Saudi gross domestic product, according to the World Travel and Tourism Council.

A sharp drop in oil prices - more than a fifth since the start of the year - is also expected to weigh on the kingdom, the world’s biggest oil exporter.

Japan’s MUFG slashed its growth forecast for the Gulf to 1.7% from a previous 2.5% on Monday due to the virus outbreak. It expects lower Chinese energy demand, slower tourism flows, disruptions to supply chains, and lower oil prices to have an impact on regional economies.

Lower oil revenues may also slow the pace of increase in Saudi foreign reserves – which in January rose to $502 billion, up for the third straight month.

“We expect the reserves to come back under pressure again following the rapid deterioration in the oil market, with the GCC potentially having to shoulder the brunt of further supply cutbacks following demand destruction,” Arqaam said.

$1 = 3.7512 riyals Editing by Catherine Evans

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