Saudi GDP growth to recover on higher oil price, says IIF

Fiscal deficit will narrow by 3 percentage points as oil earnings climb, a new study has found

Saudi Arabia's GDP growth is expected to recover to 2.2 per cent in 2018 after contracting 1 per cent last year, but the breakeven oil price is expected to be higher than average oil prices, accordingShow more

Saudi Arabia’s GDP growth will lift to 2.2 per cent in 2018 as oil prices climb, however the kingdom’s breakeven oil price will also rise due to a projected increase in public spending, a report from the Institute of International Finance (IIF) said.

“Saudi authorities need to avoid complacency in the context of the partial oil price recovery,” Garbis Iradian, chief economist for IIF Mena, wrote in a paper on Friday.

After contracting 1 per cent in 2017, Saudi Arabia’s GDP growth is set to recover to 2.2 per cent this year reflecting higher oil production and the effect of substantial fiscal stimulus spending, according to the report from the global association of financial institutions.

Higher oil prices - which reached $80 per barrel in May - will provide a boost to economic activity in Saudi Arabia, helping to strengthen its external position and reduce the deficit by nearly three percentage points to 5.8 per cent of GDP in 2018, it said.

The oil price hike is also expected to widen the current account surplus to $82 billion in 2018, equivalent to 10.6 per cent of GDP, up from $15bn last year. Official reserves will increase by $36bn to $532bn by the end of 2018.

Elevated public spending will further drive growth in 2018, the IIF said, as the Saudi authorities benefit from additional oil revenue to “loosen their fiscal stance” following three years of consolidation.

“At an average Brent oil price of $72/barrel – 33 per cent higher than the average price in 2017 – and a 1.5 per cent increase in oil production, revenue gains will more than offset the high level of public spending (an increase of 18 per cent),” the report added. Public debt will remain below 30 per cent of GDP up to 2020.

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Despite forecast growth, the rise in public spending is expected to push up Saudi Arabia’s fiscal breakeven oil price to $92 per barrel, from $84 in 2017, the IIF said.

Saudi authorities must therefore avoid complacency and ensure that government spending is not increased rapidly to levels that could become unsustainable if oil prices fall again from 2019.

However, the IIF expects both external and fiscal breakeven oil prices to decline beyond 2018, helped by a significant increase in volume exports of oil, improvement in non-hydrocarbon revenues and a lower increase in public spending.

The kingdom must sharpen efforts to boost private investment, which remains weak, the report said. Non-oil growth in the first half of this year could remain below 1 per cent, even though authorities have ramped up efforts to improve the business environment, it added.

The headline seasonally adjusted Emirates NBD Purchasing Managers’ Index (PMI) for Saudi Arabia - designed to give an overview of operating conditions in the non-oil private sector economy - recorded its strongest expansion in three months in May, rising to 53.2 from a record low of 51.4 in April.

However, the UAE-based lender said the index reading is “still low by historical standards” reflecting a slower rate of growth in the non-oil private sector than last year.