Saudi Arabia: More Deterioration

While the economy appears to have ended 2018 on a solid footing, prospects for this year are quickly deteriorating. This is predominantly the consequence of oil production cuts agreed in December among OPEC+ countries, which will drag on GDP growth this year. That said, the oil production caps have started to boost oil prices, which should shore up government revenues somewhat. Moreover, the economy remains constrained by the government’s Saudization policy, which intends to boost the number of jobs for Saudis in the private sector by imposing labor restrictions on foreigners. According to analysts, the amount of expat jobs in the country—especially in the retail sector—declined by around 1.5 million people in the 2017–2018 period; the unemployment rate among Saudis in the same period has nevertheless remained virtually unchanged, hovering around 13%.

Despite greater fiscal support, the economic recovery is likely to lose some steam this year as an uncertain global oil outlook, oil production cuts in compliance with the OPEC+ deal and negative spillovers from the Saudization policy are expected to hit economic activity. Moreover, key economic reforms appear to have stalled, which threatens long-term economic growth in the country. Our panel expects growth of 1.9% in 2019, which is down 0.3 percentage points from last month’s projection, and 2.2% in 2020. Inflation plunged from November’s 2.8% to 2.2% in December, mainly reflecting weaker price increases for restaurants as well as a sharp drop in housing rentals. Inflation should moderate further down the road as the effect of the introduction of a VAT on 1 January 2018 completely fades. FocusEconomics panelists project that inflation will average 2.0% in 2019, which is unchanged from last month’s estimate. Next year, the panel sees inflation at 2.2%. Monetary policy is tied to exchange rate policy and the Saudi Arabian Monetary Authority’s (SAMA) priority is to keep the riyal’s peg against the USD. The country thus follows U.S. monetary policy and, to defend the currency peg, the SAMA hiked its main rates on 19 December after a similar move by the Fed. Saudi Arabia maintains an exchange rate system with full convertibility and no restriction on capital flows. 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. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2023.

PMI moderates in December

The Purchasing Managers’ Index (PMI), sponsored by Emirates NBD and produced by IHS Markit, fell from 55.2 in November to 54.5 in December. Nevertheless, the index remained well above the 50-threshold that indicates expansion in business activity in the non-oil producing private sector. The softer improvement in business conditions reflected weaker growth in output, albeit it remained comfortably above the 2018 average. Growth in new orders softened in December, mostly due to subdued external demand. As a result, employment growth remained weak as it did purchasing activity. Strong competitive pressures continued to squeeze margins, while input prices increased due to higher equipment and raw materials prices. Looking forward, Khatija Haque, head of MENA research at Emirates NBD, commented that: “Business optimism remains strong in Saudi Arabia, and the future output index climbed to the highest reading in five years. 53.8% of respondents expect that output will be higher in 12 months’ time, with no firms expecting a deterioration in conditions.”

FocusEconomics Consensus Forecast panelists see fixed investment rising 5.0% in 2019, which is up 0.5 percentage points from last month’s estimate. For 2020, the panel expects fixed investment to increase 5.4%. The government projects growth of 2.6% in 2019. FocusEconomics panelists project GDP to expand 1.9% in 2019, which is down 0.3 percentage points from last month’s estimate. For 2020, panelists expect the economy to expand 2.2%.