Arab world’s largest economy is on track to recovery after a tough few years amid slumping oil prices
Saudi economy year in review: A period of reinvention
It would not be wrong to call 2017 a year of transformation for the Arab world’s largest economy, on both social and economic fronts. While some of Saudi Arabia’s moves to bring about social structural changes have garnered more attention, Opec’s biggest oil producer has steadfastly advanced its economic reform agenda and moved decisively to tackle corruption.
“If resolved successfully [reform policies and anti-corruption efforts], coupled with higher oil prices, this could lead to higher medium-term growth potential and economic growth finding a bottom this year,” the Bank of America Merrill Lynch (BofAML) economist Jean-Michel Saliba said in a research note released on December 7.
The big announcements from the kingdom; the crackdown on corruption, launch of the US$500 billion Neom megacity project, allowing women to drive in 2018 and a decision to lift ban on cinemas after more than 30 years, have all stirred headlines in international media.
Although, despite a glum macro environment in 2017, in which Saudi Arabia’s GDP contracted for a second consecutive quarter – shrinking 1 per cent in the second quarter and 0.5 per cent in the first three months of 2017, the country remains on track to meet its budget targets set for the year, the finance minister Mohammed Al Jadaan said in November.
The kingdom is announcing its 2018 budget today and BofAML said assuming oil at US$60 per barrel, Riyadh will face a choice to either save 3 per cent of the GDP in an oil revenues windfall, or spend it and boost non-oil real GDP by 0.5 percentage points.
“Further spending could raise the fiscal breakeven oil price and make it stickier, exposing the budget to oil price volatility. Higher oil prices will cut external financing requirements, as we estimate every $10 per barrel increase in oil prices translates to $5bn to $7.5bn in lower annual external borrowing requirements,” according to BofAML economists.
The kingdom managed to reduce its budget deficit by 9.4 per cent in the third quarter of this year as increased taxes – introduced in the second half of this year – and non-oil revenues offset lower income from crude.
The country’s deficit stood at 48.7 billion riyals (Dh 47.69bn) for the three months to the end of September, compared with 53.8bn riyals for the same period last year, but up 5 per cent quarter-on-quarter.
The IMF projects the fiscal deficit will narrow substantially in the coming years. It is expected to decline from 17.2 per cent of GDP in 2016 to 9.3 per cent of GDP in 2017, and to just under 1 per cent by 2022.
These projections, however, are subject to “on schedule” introduction of the major non-oil revenue reforms, energy price increases outlined in the country’s fiscal balance programme and the realisation of operational and expenditure savings identified by policymakers in Riyadh, the fund said in October. The deficit is expected to continue to be financed by a combination of asset drawdowns and domestic and international borrowing, the IMF added.
“The country’s current account balance is expected to move into a small surplus in 2017 as oil export revenues increase and import growth and remittance outflows remain relatively subdued,” the IMF said.
It did, however, point out that net financial outflows are expected to continue, and net foreign assets to decline, although remaining at a comfortable level.
Saudi Arabia still relies heavily on the sale of hydrocarbons for revenues and has struggled to maintain the pace of economic growth since oil prices fell from mid-2014 peak of $115 a barrel, forcing the government to cut spending and implement fiscal and structural reforms.
The government, which had to drawdown on its foreign reserves to continue expenditure, also launched an anti-corruption crackdown, detaining high-profile businesses men, some members of the royal family and current and former government officials.
The move is aimed at bringing $100bn in assets back to state coffers, according to Crown Prince Mohammed bin Salman, who is leading the kingdom’s economic diversification agenda.
The IMF estimates Saudi Arabia’s non-oil growth to pick up to 1.7 per cent in 2017, but overall real GDP growth is slated to be close to zero as oil GDP declines in line with Saudi Arabia’s commitments under the Opec and non-Opec oil producers’ production cuts agreement. The crude output cuts have already started pushing the oversupplied market towards rebalancing and the oil price has edged up in recent months to around the $63 a barrel level.
BofAML said the country’s anti-corruption drive could improve accountability and governance, especially if transparency improves.
The kingdom, the lender said, is now firmly focused on growth and Riyadh is intent on supporting the economy through gradual phasing in of fiscal reforms, introduction of structural reforms such as women driving, the development of an entertainment industry and the launch of infrastructure projects led by the sovereign wealth fund, Public Investment Fund, such as the Neom special economic zone.
“Oil prices are likely to be a determinant of the success of the reform programme,” said BofAML in a researech note.
“At oil prices of $40 per barrel, announced fiscal reforms are insufficient to safeguard macroeconomic stability. The $40 to $50 per barrel range for oil prices is a grey zone. We draw more comfort in the success of fiscal reforms at $60 a barrel, assuming no changes in the programme.”
The pace of economic growth in the kingdom has slowed but it is poised to accelerate.
Economies undergoing reform processes usually go through a “J-curve”. The IMF is bullish about the prospects of the reform process and Jihad Azour, the fund’s director of its Middle East and Central Asia department, in October said the kingdom is on the right path.
The IMF had advised the Saudi authorities to not rush to balance the budget by 2019, predicting equilibrium by 2022.
“In the case of Saudi, the adjustment of the fiscal can be phased in a way that would allow them some flexibility and they are in the right direction,” Mr Azour said at the time.
“The set of reforms that they are implementing and planning in terms of fiscal consolidation will help them progressively to reduce their level of budget deficit and reach a situation of balancing their budget in the years to come.”