2019-01-09

Saudi Arabia Deteriorates




The economy benefited from increased crude oil production and higher prices for the black gold in the third quarter, prompting GDP to expand at the fastest pace in two-and-a-half years. Although growth in non-oil private activity accelerated slightly, it remained low compared to historical figures. Subdued dynamics in the private sector, a rising unemployment rate and low levels of foreign investment are casting doubts over the much-trumpeted Saudi Vision 2030. In order to shore up economic growth, on 18 December, the government announced an expansionary budget for 2019, which focuses on boosting capital expenditure. Analysts, however, warn that the projected revenues could be on the optimistic side. While the implied price is about USD 70 per barrel, oil prices have fallen in recent weeks and hit an over one-year low of USD 50.1 per barrel on 26 December.

The economic recovery should broaden this year due to renewed fiscal stimulus, which should support domestic demand. Although the Saudi government sees the recent drop in oil prices as temporary, it is still unclear whether the recently-approved oil production cut will be enough to push up oil prices. Our panel expects growth of 2.2% in 2019, which is down 0.2 percentage points from last month’s projection. In 2020, growth is also seen at 2.2%.

Inflation rose from October’s 2.4% to 2.8% in November, the highest reading in eight months. Inflation should moderate this year on the back of subdued domestic demand and as the impact of the VAT fades. Panelists project that inflation will average 2.0% in 2019, which is down 0.1 percentage points from last month’s estimate. Next year, the panel sees inflation at 2.2% in 2020.

The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003 and has had a de-facto peg to the greenback since 1986. To defend the currency peg against the USD, the Saudi Arabian Monetary Authority hiked its repo and reverse repo rates by 25 basis points on 19 December following a similar decision by the U.S. Federal Reserve on the same day. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2023.

Government unveils an expansionary budget for 2019 despite the recent fall in oil prices On 18 December Saudi Arabia presented its budget for 2019, which is the Kingdom’s largest ever in a bid to spur faltering economic growth. Despite the media-grabbing Saudi Vision 2030—intended to diversify the economy away from oil—the Saudi economy is still heavy reliant on state-funded activity, which mostly comes from oil revenue. Moreover, foreign investment remains low and the unemployment rate among Saudis continued to climb in the first half of 2018, despite the implementation of the Saudization scheme, an initiative to force companies to hire Saudis. The government plans to increase total spending by 7.3% to a record high of SAR 1.1 trillion (USD 295 billion) this year, despite the recent decline in oil prices. The increase will be mostly driven by a 20.0% increase in capital expenditure, while current expenditure will rise a modest 4.2%.

Although the 2019 budget does not include a reduction in Saudi Arabia’s lavish subsidy system, it entails a sizeable reduction in military spending despite Saudi Arabia’s significant involvement in the conflict in neighboring Yemen. Finally, unlike in preceding years, authorities did not include details about the planned off-budget spending by the Public Investment Fund, Saudi’s main sovereign wealth fund, suggesting that investment could be even higher. Government revenues are expected to jump 9.0% this year, leaving a fiscal gap of 4.2% of GDP (2018: deficit of 4.6% of GDP). Analysts warn that the increase in oil revenues could be on the optimistic side as the implied oil price assumption for the 2019 budget is around USD 70 (Q4: USD 56.5), threatening to derail the government’s consolidation efforts. The budget also includes an increase in non-oil revenues mainly due to higher expat levies. The public debt is expected to rise from 19.1% of GDP in 2018 to 21.7% of GDP in 2019.

The Saudi government presented a budget intended to shore up growth amid sluggish economic conditions, especially in the private sector. Although projected revenues appear to be optimistic, the government considers that the current drop in oil prices will be temporary and that the planned oil production cut (effective January 2019) will prop up crude oil prices going forward. While the increase in capital expenditure is good news for the economy, there are doubts about the pace of execution of the investment projects. FocusEconomics panelists project the fiscal deficit to reach 4.6% of GDP in 2019. Next year, the fiscal deficit is forecasted to inch up to 4.7% of GDP.

The oil sector propels economic growth in Q3 Saudi Arabia’s economic recovery gathered steam in the third quarter on the back of higher oil prices and increased crude oil production. GDP expanded 2.5% year-on-year in Q3, following the 1.6% rise in Q2 and marking the best result in two-and-a-half years.

The Kingdom ramped up production in the July–September period in order to offset declining output in Iran and keep global oil markets adequately supplied. The United States was piling pressure on Iran’s trade partners to cut down purchases of Iranian oil to “zero” by 4 November, when the bulk of the new sanctions had been planned to be reimposed. As a result, crude oil production in Saudi Arabia jumped from an average of 10.11 million barrels per day (mbpd) in Q2 to 10.42 mbpd in Q3. Fears that increased oil production by key players, mainly Russia and Saudi Arabia, was not enough to compensate Gross Domestic Product | variation in % Note: Year-on-year changes of GDP in %. 

Therefore, the average price of the OPEC oil basket rose from USD 72.0 in Q2 to USD 74.1 in Q3. Against this backdrop, growth in the oil and gas sectors rose from 1.3% in Q2 to 3.7% in Q3, marking the best result in nearly two years. On the downside, economic dynamics in the non-hydrocarbon sector moderated from a 2.4% increase in Q2 to a 2.1% rise in Q3. That said, the deceleration came entirely from the non-oil public sector, suggesting that authorities took their foot off the pedal following several quarters of stimulus, although growth in the non-oil private sector in Q3 still remained sluggish compared to historical figures. Saudization, the government’s initiative to reduce unemployment among native Saudis, is prompting an exodus of foreign workers this year, likely impacting the performance of the private sector, especially that of retailers. 


From the expenditure point of view, economic growth was fueled by an acceleration in gross fixed capital formation (Q2: +5.2% year-on-year; Q3: +8.9% yoy) and robust government spending (Q2: +7.5 yoy; Q3: +7.6% yoy). Conversely, private consumption growth moderated from 2.5% in Q2 to 1.6% in Q3. Exports of goods and services benefited from healthy dynamics in the oil market and expanded 8.0% in Q3 (Q2: +7.0% yoy). Improved domestic activity boosted imports, which rose 7.2% (Q2: -6.5% yoy). In the accompanying release to the 2019 budget unveiled on 18 December, Finance Minister Mohammed al-Jadaan announced that the economy likely expanded 2.3% in the full-year 2018, implying a growth rate of around 4.0% for the final quarter of 2018. Looking ahead, the recent fall in oil prices, the agreement to cut oil output in 2019 and weaker prospects for the global economy all threaten Saudi Arabia’s economic recovery.

Moreover, geopolitical risks remain large, with the country engulfed in a war in Yemen and the killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul rattling relations with the West. That said, the Saudi government approved an expansionary budget for 2019, which should shore up growth this year. The government projects growth of 2.6% in 2019. FocusEconomics panelists project GDP to expand 2.2% in 2019, which is down 0.1 percentage points from last month’s estimate. For 2020, panelists also expect the economy to expand 2.2%.

MONETARY SECTOR | Inflation hits an eight-month high in November Consumer prices fell 0.2% over the previous month in November, following October’s 0.3% decline. The drop was mainly due to lower prices for housing, water, electricity, gas and other fuels as well as for restaurants and hotels. In November, inflation climbed from 2.4% in October to 2.8%, marking the highest reading in eight months. Meanwhile, the annual average variation in consumer prices increased from 1.8% in October to 2.2% in November, reaching the highest level since March 2015. FocusEconomics Consensus Forecast participants expect inflation to average 2.0% in 2019, which is down 0.1 percentage points from last month’s projection. The panel sees inflation averaging 2.2% in 2020.

EXTERNAL SECTOR | Oil prices drop in December on global oil glut fears On 26 December, OPEC oil prices fell to their lowest since September 2017 (USD 50.1 per barrel) due to concerns over excess supply. In the following days, the price for the OPEC oil basket was broadly stable and, on 4 January, it traded at USD 53.0 per barrel, down 13.3% from the same day in December and 19.9% lower than on the same day in 2018 The slide in oil prices was triggered by President Trump’s decision in early November to grant sanction waivers to eight countries, allowing them to continue buying Iranian crude oil until May. Russia, Saudi Arabia and other producing countries had already started pumping more oil in order to keep global oil markets adequately supplied in the event of a sharp reduction in Iran’s oil exports. The United States also continued to produce oil at all-time highs in recent months due to the country’s flourishing shale oil industry. On the demand side, there had been growing concerns about an economic slowdown in 2019, which would likely trim demand for energy products. Moreover, OPEC and Russia’s decision to cut oil production by 1.2 mbpd as of January in an attempt to support prices had little impact on the global oil markets. The deal was clinched at OPEC’s regular meeting on 7 December. Before the meeting, Qatar unexpectedly announced its withdrawal from the oil cartel, effective January, after nearly 60 years of membership. Although Qatari officials stated that this was driven by the Kingdom’s strategy to focus on its gas industry, analysts point out that the ongoing diplomatic spat between Qatar and Saudi Arabia likely prompted the decision.